Using the New First-Time Homebuyer Tax Credit: Do you Qualify for New Credit? Should you Take it if you Do?

The government's new first-time homebuyer tax credit was included in the Housing and Economic Recovery Act - better known to most taxpayers as the $700 billion bailout passed by Congress late last year. The goal of the tax credit is simple: government officials hope it boosts the flagging housing industry by encouraging people who are otherwise uncertain to make the investment of purchasing a home. The new credit is open to those taxpayers who bought a home recently or are considering buying a residence soon. Buyers must not have owned a main home during the last three years to be eligible for the credit.

The measure has a short lifespan, with the credit only available for homes bought from April 9, 2008, to June 30, 2009, according to the Internal Revenue Service. It also comes with an important restriction: it only covers homes that its owners are using as primary residences. This means owners cannot claim vacation homes or second homes.

For taxpayers, the best news is that the first-time homebuyers credit is not a deduction, but a true credit - one that will reduce your income-tax liability on a dollar-for-dollar basis. Taxpayers who owe $8,000 on their federal income taxes and claim the full $7,500 credit, would then owe the government only $500.

All the news, though, is not so good. The biggest drawback is that the tax credit is actually a loan, as consumer site Bankrate.com reports. Taxpayers claiming it must pay back the federal government over a 15-year period. Taxpayers do this by adding their debt to their tax payments in future years in small amounts until the tax credit is finally paid off. There is another catch, though: taxpayers who sell their homes before the 15-year repayment period ends will have to pay back the entire amount they still owe.

The credit is a good option for new homeowners who are struggling to pay their bills and need a financial break now. But it is not a credit that every first-time homebuyer should automatically take. Those who are doing well financially may want to reconsider claiming the credit now. They may get caught having to pay it back in future years when their incomes may have fallen.

The best decision is for taxpayers to meet with their accountants and financial planners before making a decision.