ALEX COHEN, host:
From the skies to issues here on the ground. As we heard earlier in the program, housing finance giants Freddie Mac and Fannie May are in trouble. That's due to what's been going on in this country.
ALEX CHADWICK, host:
There's a mortgage crises, a credit crunch. The economy's spiraling, so maybe you are putting off those plans to buy your first home. The federal government wants to keep the economy moving, of course, so rolled into the housing and economic recovery act that Congress has just passed is a tax credit. It provides 7,500 dollars for qualified first-time buyers. There are a lot of caveats in this, though. Here to help explain things, Michelle Singletary. She's personal finance contributor for Day to Day. Michelle, what's the first thing for people to know here?
MICHELLE SINGLETARY: Well, first of all, they describe it as a credit, but it's really a loan, and lots of people don't realize this. This is a 15-year loan that is repayable to the Internal Revenue Service. Now, the good part about it is that there's no interest charge. But it's still debt, and basically, they sold it as a credit. And it is a credit initially. But after that, you have to begin to pay this back. It is a loan for sure.
CHADWICK: Gee, that doesn't sound like a credit to me.
(Soundbite of laughter)
SINGLETARY: Its not.
CHADWICK: When do you have to start paying it back?
SINGLETARY: The first yearly payment of 500 dollars is due the second tax year after you purchase the home. So, for example, if you took this credit on your 2008 tax return, you would begin making the yearly payments in 2010.
CHADWICK: So what if you move, you sell your house? Do you pay the money back right away, or can you stretch it out for a while?
SINGLETARY: No, in fact, if you sell your home, or if you change your principle residence, any remaining loan balance will be due immediately. If there's no gain on the house however, the remaining loan is forgiven.
And basically, they figure out the gain the same way they do under other IRS rules. So let's say you've got this house, and you decide to buy another house, and you're going to rent this one out. That loan becomes due right away. So if you do it, say, after two years, you may still owe, you know, several thousand dollars on this loan to the IRS. And that's very important. This is a tax credit at the beginning but a tax liability at the end.
CHADWICK: So what if you don't want to buy a traditional, you know, stand alone home somewhere? Can you take this 7,500 dollar credit, as we're calling it, for a condo or even, say, a mobile home?
SINGLETARY: Yes, you know, the key is, is this your principal residence? So according to the IRS, mobile homes would qualify if it's your principal residence. But I also need to point out that the law defines a first time homeowner as an individual who's had no ownership interest in a principle residence for the three-year period ending on the day that they purchase their home.
CHADWICK: Well, this is a credit, or it's an obligation, or I'm not quite sure what. What is your stance on this? Is it something people should take or not?
SINGLETARY: I think you should be very careful about taking this. If you absolutely need this money to perhaps help get you into your first home, because that's why it was created, then, yeah, look at it. But if you don't need this credit, if you've already got your home, remember, this is a debt to the IRS.
(Soundbite of laughter)
SINGLETARY: You know, I'm stretching it out because...
CHADWICK: They're very serious about collecting their money.
SINGLETARY: They are very serious about collecting, and the thing about it is, you know, you may forget a couple of years down the road that you even took this credit, and then, if you don't pay this debt on time, the unpaid loan is treated like any delinquent tax obligation, meaning the standard and stiff IRS interest penalties apply. For example, interest on IRS debt that's outstanding is compounded daily and is charged on the interest rates, the federal short rate, plus three percent. I can see so many people taking this credit forgetting that they took it, sell their house in a couple of years, forget that they owe the government five or 6,000 dollars, and then get a tax bill with all the penalties on top of it.
CHADWICK: Wow. Michelle Singletary is Day to Day's personal finance contributor. There's a good tip from her. She writes the Color of Money column for The Washington Post. Michelle, thank you.
SINGLETARY: You're welcome.
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