Prior to 2008, the real estate market was essentially the prime driver of the United States economy after consumer spending. The housing bubble began to burst in 2008 and the subsequent collapse of the housing market continues to be a major problem into 2010 and is project to remain so through 2011 at the earliest. As a consequence, the United States government has passed several different measures extending tax credits to both first time home buyers and long time home owners in an effort to boost the housing market.

The first measure was the Housing and Economic Recovery Act of 2008, which created a tax credit for first time homebuyers of up to $7,500. Contrary to some of the information being circulated online, this tax credit was not a traditional tax credit which is paid out without an obligation to pay it back; instead it operated much like an interest free loan from the federal government and has to be paid back gradually over the next fifteen years. This initial measure only related to homes purchased between April 8, 2008, and before Jan. 1, 2009 and only first time homebuyers could qualify, specifically defined as people that had not owned a primary residence for the previous three years. This measure only met with limited success because at the time most residential property values were actively declining, meaning that very few people were willing to buy new homes until the market bottomed out.

Due to the limited success of the first law, the terms were significantly changed through the American Recovery and Reinvestment Act of 2009 (and supplemented by the Worker, Homeownership and Business Assistance Act of 2009). These increased the potential tax credit to $8,000, and extended the time period from January 1, 2009 through May 1, 2010. Further, these additional measures dropped the first time home buyer requirement, extending the credit to long time homeowners, defined as people who have owned a primary residence consistently for five years prior to buying their new home. The fact that most American real estate markets have already bottomed out and that long time home owners – those most likely to qualify for a new mortgage loan in the current climate of tight credit – means that most analysts believe these new measures will be much more successful.

People wishing to claim this credit have to file a paper return and include the special Form 5405 and the required supplementary documentation required by the 5405. The precise guidelines governing who can, and can not, claim the tax credit are provided both on the Internal Revenue Service (IRS) website (www.irs.gov) as well as with the instructions accompanying Form 5405. There are details conditions relating to when you bought your home, your personal filing status, the value of the home in question, the amount of your annual income, who you purchased the home from, your age at the time of the purchase and many others. Therefore anyone considering claiming the credit should take the time to carefully read over all the requirements first.

The tax credit can been very advantageous, and since it is credited back immediately, can serve as a down payment for some home purchases.

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