Wednesday is the deadline to file taxes, and some first-time homebuyers will be claiming a credit enacted last year to stimulate the economy.
The legislation promised a tax credit of $7,500 for people if they bought in 2008 and $8,000 if they buy this year. But some buyers say the credit fails to live up to its promises.
Ruth Ramberg is in many ways a perfect candidate for the policy. She's single, 72 years old and lives off Social Security and one small annuity.
When she bought a condo in Palo Alto last year, her accountant told her she qualified for the first-time homebuyer credit. "I was ecstatic," Ramberg says.
Before she bought, Ramberg says she was struggling to make her rent on her small monthly income. She figured if she could buy something straight out, she wouldn't have a mortgage payment at all.
So she went all in. She cashed out her retirement and paid $135,000 in cash for her one-bedroom condo. "This was my last hurrah," she says.
Ramberg says the government's offer of a tax credit would have helped her out a lot, and it confirmed that she was making the right choice. "That seemed like the universe was OK with this," she says, "and I was going to be able to not be anxious."
But when her accountant started looking over her finances, he realized there was a problem. Because Ramberg took the money out of her retirement fund to buy the house, her income technically jumped beyond $75,000 — over the limit for eligibility in the program.
"It's unfair," says David Hatt, Ramberg's accountant. He says Ramberg wasn't his only client to run into this problem this year. And he's frustrated with government officials who failed to foresee his clients' dilemma.
"They encourage people to buy a home," Hatt says. "But the people with low income take out money from IRAs, as my clients did. Except when they take money out, it puts them above the threshold for taking this credit."
In 2008, More Of A Loan Than A Break
Some accountants say that even if clients made first-time home purchases last year and were eligible for the tax break, they advised them not to take it — because the credit is really a debt in disguise.
Connie Kurtz is a tax agent, similar to an accountant but licensed by the federal government. She says the word "credit" is not entirely accurate. That's because the 2008 rules require homebuyers to pay back the $7,500 to the federal government — $500 every year.
In other words, Kurtz says, claiming the credit "basically was taking a credit card out and having a debt that you were incurring when trying to buy a new house."
"People were afraid" to claim the credit, she adds, "because think about this: You have to pay that back on your tax returns. So if you end up owing the IRS money at the end of the year because of this, then you also owe them interest and penalties."
Kurtz said she only advised clients to take the loan if it meant the difference between buying a house or not buying a house.
"I think one has taken it," she says, "and the rest have said no."
2009 Buyers Better Off
But for people buying in 2009, there is very good news: The rules changed under President Obama's stimulus package. They don't have to pay the government back.
"This is like winning the lottery," Kurtz says, "like $8,000 you get to keep."
Amanda Wise wishes she had known that a better deal was coming. Wise, a life coach who lives in Maryland, bought her home in 2008. Had she waited to buy for a few more months, she would have benefited from the far more generous tax credit now in place.
"You know, what I feel like doing sometimes is going in for a price adjustment on my house," she says.
But even the 2009 tax credit has its critics, because it still has an income eligibility limit. Some tax professionals argue that giving the tax break to all first-time homebuyers would do much more to stimulate the economy.
The Senate Financial Services Committee says it adopted the eligibility limit in order to block people with low wages — but high amounts of other income — from claiming the credit.