In the last week, I’ve received emails from just about every person I know who works in real estate. They all want to remind me that if I buy a house this year, the government will give me $8,000. My dad even called, telling me that he didn’t want me to miss out on this chance for what amounts to free money. I would like to buy a house in 2009 — but I’m not so sure that the tax credit should be such a major incentive.

A Real Estate Agent’s Perspective

Real estate agents are taking steps to point out the tax credit to all of their potential clients. In part, they want to help their clients as much as possible. But there’s more to the tax credit’s popularity with real estate agents. Business is down in the real estate sector — and agents only make money when a client buys a house. Furthermore, the amount of money an agent earns is based on the cost of the house in question. It’s in every agent’s interest to promote more clients to buy, especially if those clients can afford more expensive homes. The tax credit adds a little more to the ability of the average first time home buyer to purchase.

I’m not saying that it’s a bad thing that real estate agents are promoting this tax credit. But it’s worth remembering that they aren’t disinterested parties.

The Home Buyer’s Perspective

In the grand scheme of things, the tax credit won’t really determine whether or not you’ll buy a house. It doesn’t affect the amount of money you have available for a down payment or to make payments toward your mortgage. Heck, you won’t even see that money until after you file your 2009 tax returns and get your refund. At best, you can use it towards making larger payments on your mortgage. That’s assuming you get the money at all. There are plenty of restrictions on who’s actually eligible for the tax credit — and Uncle Sam actually has first dibs towards the money. If you owe taxes for 2009, your tax credit will be applied to that bill before you even see a cent.

If you’re looking for a house in 2009, it’s worthwhile to ignore the tax credit. If you can’t make the down payment comfortably without getting a check for $8,000 some time in 2010, you shouldn’t be making the down payment at all. There’s a reason the housing industry is so desperate to make sales right now: the credit that was extended to people who couldn’t really afford it allowed people to rely on money they didn’t have, but only for a little while.

2009 does have some opportunities for home buyers. It’s good to take those opportunities into consideration during the buying process. But the tax credit, along with other opportunities, shouldn’t be your motivation or your method for buying a house. It’s crucial to make sure your finances are stable enough to manage such a purchase — without $8,000 somewhere down the line.

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Part of the Housing and Economic Recovery Act of 2008 is a tax credit for first-time buyers purchasing a home between April 9, 2008 and July 1, 2009. The government will hand over up to $7,500 to you, if you qualify. The catch is that you have to pay back the IRS over the next 15 years.

The deal sounds pretty good on the surface. Sure, the money is really a loan, rather than a tax credit. But you get a whole 15 years to pay it off and there’s no interest. But is that free money really a good choice?

The National Association of Home Builders certainly thinks you should take the credit. If you look at their home page, you’ll see that they’re describing the temporary tax credit as “the opportunity of a lifetime.” The government did create the tax credit, after all, to boost sales of both existing and new homes. NAHB’s membership has had a rough year, too.

But just because a loan is interest-free doesn’t mean that you should take it. If you can’t afford to pay back a loan, you shouldn’t take it. It doesn’t matter how good the terms are. After all, you’ll be making mortgage payments as you try to pay back your ‘tax credit.’ If you miss a payment or don’t repay the loan, you’ll get hit with the IRS’ standard penalties and fees for outstanding tax debt. That’s 0.5 percent each month just for the penalty, and there is no maximum penalty. On top of that, the IRS charges another 5 percent per year on unpaid taxes. It just gets scarier and scarier.

There’s another catch that comes with the tax credit: if you sell your new house, the balance becomes due immediately. If you buy a house now, do you really think you’ll be in the same house 15 years from now? You may think so, but statistics say no. You’ll probably be moving in the next six years or so.

You can’t just move what you owe on your tax ‘credit’ over to a new home. The IRS expects you to pay off the balance out of your profits from the sale. If your sale isn’t profitable enough to cover it, the money comes out of your pocket.

Now that I’ve scared you with all the details of the the temporary tax credit, though, I’d like to say that it’s not necessarily a bad deal. If you really do need the money, this loan has much better terms than adding to the debt on your credit card. If you wound up in a mortgage that is less affordable than you thought and you qualify for the tax credit, I’m all in favor of taking it. Pay down your mortgage with the money. Yes, you’ll still owe that $7,500, but there won’t be any interest accruing on it.

It’s really a question of whether you need the money — not want it. Don’t take the credit if you plan to use the money for anything that loses value. But if you plan to use it for paying down debt or something similar, go for it.

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