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How_Your_Tax_Credit_Can_Pay_Your_Down_Payment_and_Closing_Costs.pdf

First-time homebuyers in California, Texas, New York and Kentucky will have bigger smiles on their faces than those in other states when they do their taxes this year. 

That’s because they qualify for state tax credits ranging from $3,000 to $10,000 in addition to the Federal credit of $8,000 that was extended and expanded in November. 

Additionally, 19 state housing finance agencies (HFAs) offer special short-term second loans to qualified buyers. These loans are available for little or no interest and may be repaid when borrowers receive their homebuyer tax credit refund.

California’s $10,000 credit is the richest, but it is under fire as the state struggles with massive debt problems. Governor Schwarzenegger is advocating setting aside $200 million in his proposed 2010-11 budget to continue and expand the credit to include existing as well as newly built homes. During 2009, the credit was available only to new home purchases.

New York recently enacted a tax credit to first-time homebuyers to encourage them to buy houses in the state.  Called the New York State Mortgage Credit Certificate, first-time homebuyers will be able to claim a tax credit up to 20 percent of their annual mortgage interest costs, a potential savings of about $1,500 a year.  The mortgage credit certificate can be used to reduce a homebuyer’s tax burden for every year the mortgage loan remains outstanding.

Texas has a similar mortgage credit scheme.  First-time buyers in that state can take a portion of the annual interest paid on the mortgage as a tax credit, up to $2,000, each year that they occupy the home as their principal residence.  The amount of the tax credit is equal to the mortgage credit rate of 35 percent multiplied by the annual interest paid.  The credit reduces the federal income taxes of the homebuyer, resulting in an increase in the homebuyer’s net earnings. 

In Kentucky, first-time buyers qualify for a state tax credit, up to $5000. Buyers must purchase a new home after July 25, 2009 and before July 26, 2010.  Like the California program, the Kentucky credit is available only to buyers who purchase a newly built home, not an existing home.

Georgia briefly had a tax credit in place this year, but it lasted only from June 1 and November 30, 2009.  The program offered first-time buyers a credit of $1,800 or 1.2 percent of the purchase price, whichever is less. Taxpayers are limited to a credit of only $600 a year starting with their 2009 return, spreading the payout over three years. With a $383 million budget shortfall in the Georgia state budget for fiscal year 2009 and projections call for a deficit in the neighborhood of $1 billion in 2010. It’s highly unlikely the homebuyer credit will return next year.

Nineteen states offer programs to help first-time buyers use their Federal tax credit to finance down payments and closing costs.  These are essentially loans financed through state housing finance agencies using the tax credit as collateral. 

For more information on these programs, see How Your Tax Credit Can Pay Your Down Payment and Closing Costs at the top of this story.