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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, August 17, 2008 Consider pitfalls before taking housing act loan These interest-free loans for first-time homebuyers can put you on the wrong side of the IRS. By Michelle Singletary, Columnist Part of the Housing and Economic Recovery Act of 2008 authorizes up to a $7,500 tax credit for qualified first-time homebuyers. Based on the questions I'm getting from readers, many people are ready to jump at this money like Scooby Doo panting after Scooby snacks. To help those considering this credit, which is really a loan, I talked to Eric Smith, a spokesman for the Internal Revenue Service, which will be handling the implementation. Following are some questions sent to me by readers and answered by Smith: Question: Do you know if this tax credit applies to mobile home purchases? Answer: It could apply to a mobile home. The key is whether you own the mobile home and use it as your main home, Smith said. Question: Can you change your W-4 form so that less income tax is withheld to get the money sooner than applying for the credit? Answer: If you want this money now rather than waiting to file your 2008 tax return, you can adjust the number of withholding allowances you take on your W-4 (Employee's Withholding Allowance Certificate). The amount of money withheld from your paycheck is determined by the number of allowances you claim on your W-4. The W-4 has a worksheet to help you figure out how many personal allowances to take, based on what tax deductions or credits you expect to claim on your return. "As a general rule, people should adjust their withholding to reflect deductions and credits," Smith said. If you are not sure how to change your withholding on your W-4 form, use the withholding calculator at www.irs.gov. Question: If you take this tax credit for 2008, when would you begin owing payments? Answer: Repayments begin the second tax year after you take the credit. So if you claim the credit on your 2008 tax return, you have to begin paying back the money in 2010. Question: Since this is a loan from the IRS, will the IRS be sending an annual loan statement to taxpayers? Answer: The details of how the IRS will collect this money or inform people have not been worked out. Smith said it is likely that a line will be added to the standard 1040 tax form to indicate the credit should be paid as part of your tax liability. Question: Can I pay off the loan early? Answer: The IRS hasn't come up with a system yet to accommodate an early payoff. Question: What happens if someone does not pay the debt back on time or at all? Answer: The unpaid loan will be treated like any delinquent tax obligation, meaning standard -- and stiff -- IRS interest and penalties apply. For example, interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent. "It's important for people to understand that this is a tax credit upfront but a tax obligation down the road," Smith said. Question: Will this be a debt that has to be settled at closing if you sell the house? Answer: This debt isn't tied to your home but rather to you as an individual taxpayer. It's not likely that the outstanding loan will be required to be paid at the closing table, Smith said. If you sell your home or it is no longer your principal residence, then any remaining loan balance would be due immediately. If there is no gain, however, the remaining loan is forgiven. The gain will be figured the same way as profit on the sale of a home under typical IRS rules taking into account purchase price, selling expenses and previous loan payments. In the case of someone who moves but doesn't sell the home, if there is an outstanding loan balance the homeowner would have to come up with the money out of pocket the same tax year once the home is no longer the principal residence. Question: If there is not a lien on the property, how will a settlement company know the debt is due when a homeowner sells? Answer: It likely will be up to the homeowners to inform the IRS that a sale has occurred and that they need to pay off the loan balance, Smith said. It's this last answer that I see as an oversight nightmare for the IRS. Let's say a homeowner sells and realizes just a $7,000 profit. However, he or she still has $6,000 left on the first-time homebuyer loan. This means the homeowner will have to set aside the bulk of that gain -- $6,000 -- from the sale to satisfy the tax debt, which would be due in the tax year of the sale. If the person isn't financially disciplined and spends the money, he or she could end up with a hefty tax liability. "We have to look at all the issues involved with this credit and figure out the best controls," Smith said. No kidding. Washington Post Writers Group

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