As you probably can tell, we are big fans of the Home Buyer Tax Credit. We think it’s a great program that will help a lot of people in their home purchases, and stabilize the real estate market through the spring until the economy (hopefully) recovers enough to allow the market to grow on its own.
That said, we’ve spent a lot of time analyzing the actual legislation and the IRS interpretations of the legislation that will govern how the Home Buyer Tax Credit will apply in practice, and we see both some smart things that have been done, and some dumb things.
The “smart decisions” are the ones that Congress properly incentivized home buyers to stimulate the housing economy, or crafted the tax credit to make the credit work better. The “dumb decisions” are the ones we think will undermine the essential Congressional intent to apply the tax credit equitably to spur housing demand.
So here are what we think are three “smart decisions,” and we’ll post the “dumb decisions” later this week.
Smart Decision #1: Not making it retroactive
Congress made a smart decision in not making the November 2009 tax credit retroactive for buyers who closed prior on or prior to the November 6th effective date. Obviously, my heart goes out to those people who unwittingly closed on the verge of a new tax credit that they might have been able to claim, and it certainly seems unfair to people who were eligible under the new guidelines — either as long-time homeowners or under the raised income limitations.
But otherwise Congress would have granted “windfalls” to buyers who closed prior to November 6th. Those people bought their homes with the understanding they wouldn’t be able to claim a credit, but still bought, so they obviously did not need the credit to induce them to buy.
Whenever Congress set the date there were going to be winners and losers, so it was unavoidable that some people would not be able to claim the credit, even though if they’d waited a few more days to close they would have gotten it. When Congress changed the first-time home buyer tax credit in April 2008 from a reimbursable credit paid back over 15 years into a true credit that does not need to be paid back, it made those changes retroactive to closings on January 1, 2008 or later. That made eligible buyers who closed on December 31, 2008 “losers,” since they have to pay their credit back, but it made windfall “winners” of people who closed in the 2008 first quarter without expecting a true credit. That might have been a smart decision at the time, since it put money in people’s hands at a time when the government was trying to spur the general economy.
But by the time the credit was extended in November, we don’t think it would have made sense to apply the credit retroactively, to give people a windfall who were not incentivized by the credit and bought anyway based on their personal situation, rates, and prices. I hate to say that, particularly since I’ve gotten questions on our Questions section that relate to this issue from people who could use the credit, but from a purely economic standpoint this was a good decision by Congress.
Smart Decision #2: Providing a contract and a closing deadline in April and June.
One of the problems with the April 2009 tax credit was that it set a closing deadline of November 30th, without a contract deadline. That basically deprived the tax credit of any juice by the end of October, since the purpose of the credit is to incentivize people looking for homes and signing contracts — the actual closing is just the natural outcome of that behavior. But you can’t get into contract and close, in most states, in less than a month. So by early November, the credit was basically a toothless tiger, which is why Congress acted quickly to expand it. Now, the credit has a contract date and a closing date, which means that it will incentivize buyers to get into contract by April 30th, and then give everyone another two months to get through the mechanics of closings. That was smart, and provides a lot of certainty to buyers and agents.
Smart Decision #3: Allowing buyers to take the credit for 2009 or 2010 income.
Another smart decision was allowing buyers to take the credit for either their 2009 or 2010 taxable income for purchases in 2010. This was similar to what Congress did for the 2009 credit for 2009 closings, which allowed buyers to take the credit off their 2008 or 2009 taxes. This is smart because it gives a home buyer two shots to meet the income limitations, which opens the credit up to people who might have an artificially high income in one or the other tax years (based on a one-time capital gain, for example). It also fulfills the goal of allowing the greatest number of people to legitimately claim the credit, and gives 2010 buyers the money much earlier once they file their 2009 tax year returns, money they might spend to spur the economy.
Okay, so those are the smart decisions. Find out later this week what the dumb decisions are….
