The housing bill: First Time Home Buyers' Credit recapture

All about the housing bill: "Here's how the tax credit will work. You buy a
$200,000 house. The next year, when you file your income tax return, you have a
$7,500 credit. Not a deduction -- a credit. Essentially, you get to reduce your
income taxes by $7,500. That ought to make for some big refund checks.

But. Yeah, you know there's a 'but.' But you have to pay the money back
over 15 years. Say you buy the house this October. You get the $7,500 tax credit
for the 2008 tax year. That's the one with the filing deadline of April 15,
2009. Then you have to start repaying one-fifteenth of that amount, or $500,
every year for 15 years, starting with the 2010 tax year."

That's right - the first-time home buyer tax credit isn't a reduction in taxes, it's basically an interest-free loan. For the next 15 years (or until the home is sold/made into a rental), the taxpayer will pay a tax of 6 2/3% of the amount of the credit ($500/year on a $7500 tax credit). But, hey, an interest-free loan is an interest-free loan. If you haven't owned a home in the last 3 years, and your modified adjusted gross income is $70k or less (single), or $140k (married), it's a nice little bonus for buying a house. Provided you meet all the restrictions.

And, if first-time home buyers can't be expected to read a mortgage contract, it might amuse you to imagine them reading the text of the mortgage bailout law to discover that the "free" money has to be paid back:

`(f) Recapture of Credit-
`(1) IN GENERAL- Except as otherwise provided in this subsection, if a credit under subsection (a) is allowed to a taxpayer, the tax imposed by this chapter shall be increased by 6 2/3 percent of the amount of such credit for each taxable year in the recapture period.
`(2) ACCELERATION OF RECAPTURE- If a taxpayer disposes of the principal residence with respect to which a credit was allowed under subsection (a) (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer's spouse)) before the end of the recapture period--
`(A) the tax imposed by this chapter for the taxable year of such disposition or cessation, shall be increased by the excess of the amount of the credit allowed over the amounts of tax imposed by paragraph (1) for preceding taxable years, and
`(B) paragraph (1) shall not apply with respect to such credit for such taxable year or any subsequent taxable year.
`(3) LIMITATION BASED ON GAIN- In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1).
`(4) EXCEPTIONS-
`(A) DEATH OF TAXPAYER- Paragraphs (1) and (2) shall not apply to any taxable year ending after the date of the taxpayer's death.
`(B) INVOLUNTARY CONVERSION- Paragraph (2) shall not apply in the case of a residence which is compulsorily or involuntarily converted (within the meaning of section 1033(a)) if the taxpayer acquires a new principal residence during the 2-year period beginning on the date of the disposition or cessation referred to in paragraph (2). Paragraph (2) shall apply to such new principal residence during the recapture period in the same manner as if such new principal residence were the converted residence.
`(C) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE- In the case of a transfer of a residence to which section 1041(a) applies--
`(i) paragraph (2) shall not apply to such transfer, and
`(ii) in the case of taxable years ending after such transfer, paragraphs (1) and (2) shall apply to the transferee in the same manner as if such transferee were the transferor (and shall not apply to the transferor).
`(5) JOINT RETURNS- In the case of a credit allowed under subsection (a) with respect to a joint return, half of such credit shall be treated as having been allowed to each individual filing such return for purposes of this subsection.
`(6) RECAPTURE PERIOD- For purposes of this subsection, the term `recapture period' means the 15 taxable years beginning with the second taxable year following the taxable year in which the purchase of the principal residence for which a credit is allowed under subsection (a) was made.