Taking Credit

This morning (Friday, October 30, 2009), Judy and I went to an attorney’s office with our landlord/real estate agent to sign the papers and become the proud owners of a brand new town home here in Augusta. What an ordeal it is to do that!

We had to sign about two-dozen documents relating to deeds, termite inspection, closing costs, warranties, survey and releases. And that was a small stack of papers, only because we aren’t carrying a mortgage on the property. If we had applied for a loan, it would have entailed at least twice as much paperwork.

We’ve had to transfer a lot of funds around in order to get enough in our bank account to get a cashier check for the total amount due. And when we went to the bank yesterday to have the check issued, they acted like it was their money that we were taking away.

It took longer to have the check issued than it did to close on the property.

We have been renters for the past three years, but it always hurt to have to pay rent every month and not have anything tangible to show for it. In addition, with the economy in the doldrums and the dollar falling in value, it seemed like we were on the short end of a losing proposition.

Then the government came along with the first-time home buyer tax credit… Just in case you have been on a desert island for the past year, here is a recap of what the credit is.

Anyone buying a home for the first time, or anyone who has not owned a home in the past three years, is entitled to a refundable tax credit* of up to $8,000 or ten percent of the value of the purchase (whichever is the lesser of the two). The credit is available for any home purchased before December 1, 2009, although there is a move in Congress now to extend that date and possibly to increase the amount of the credit to $15,000.

*I will digress for a moment to define a “refundable tax credit.” There are two kinds of tax credits, refundable and non-refundable.

A non-refundable tax credit is one that only refunds a tax amount that you would otherwise owe to the IRS after you get to that line on your 1040 that is labeled “Taxable Income” and the subsequent line labeled “Tax.” An example of a non-refundable tax credit is Child Care Tax Credit, because you can only take the credit up to the amount of tax liability you owe. Any amount over your current tax liability is forfeited.

A refundable tax credit is one that can exceed the amount you owe the IRS, and will get you a check from the government even if you don’t owe any tax at all. A prime example of a refundable credit is the earned income credit available to low income workers with dependents. The first-time home buyer credit is also a refundable credit, so a qualified buyer can get back more than is owed to the IRS.

Since we had sold our last home in El Paso on September 24, 2006, we had a window open to claim the credit between September 24th and November 30th of this year. That was too good to pass up.

Another plus that helped us to decide on buying was that our landlord, who was also a real estate agent, promised us that if we used his services to buy a house, whether or not it was the rental property we lived in, he would not charge us for breaking the lease. That usually amounts to an extra month’s rent, and was paid up front as a security deposit when we first rented the town home.

It took us about a month to find what we wanted, and we were frankly just about ready to give up when we found a new town home in the early construction stage in a somewhat rural area. We were able to get an allowance for upgrades taken off the price, and used it to upgrade the carpet, purchase three ceiling fans with lights and a full set of high quality blinds for the windows.

The only miscalculation we made was in redeeming some shares in my IRA to assist in the purchase price. I took out enough to put me into a higher tax bracket, and it cost me part of that nice $8,000 credit. But I still cannot complain too loudly. All that money I redeemed is now invested in a real tangible asset.

Maybe I’ll put some pictures in one of the future columns after we get moved in.