Unfairness in Tax Credits and Tax Foreclosures

by Peter Vernon on Finance Foreclosures

The $8,000 tax credit offered to first-time homeowners under President Barack Obama’s American Recovery and Reinvestment Act of 2009 has highlighted the role of timing, including luck, in home buying. It has also highlighted the issue of unfairness, such as the exclusion of tax foreclosures in assistance programs.

The said tax credit is an actual tax credit to be deducted from taxes owed by the first time homebuyer. Homebuyers have also the option to claim the tax credit on their 2008 tax returns or on their 2009 tax returns.

On the other hand, the tax credit of $7,500 offered to first time homeowners who purchased their homes within the period from April 8 to December 30 in 2008 under the Housing and Economic Recovery Act is not a true tax credit. It is an interest-free federal government loan offered to the homebuyers to help them pay their taxes.

The $8,000 tax credit has made first-time homebuyers within the prescribed period winners while making first-time home buyers outside the prescribed period losers. It is similar to the situation of persons losing their homes to tax foreclosures but are not helped by the government.

The tax credit case of Indiana homebuyer Jeremy is a good illustration of misfortune and luck in home buying. Jeremy bought his first home in December 2008, about 14 days before January 1, the start of the prescribed period for the $8,000 tax credit. He has been asking whether he can still be considered for the $8,000 tax credit since his purchase date is just a few days before January 1.

The answer however is a big disappointment for Jeremy. The IRS announcement for the $8,000 tax credit specifically stated that the tax credit does not include first time homeowners who purchased their homes between April 8, 2008 and January 1, 2009.

This is where the concept of luck and misfortune in home buying enters especially so when the difference is only a few days. What is also difficult to imagine are the feelings of first-time homeowners who completed their home purchases just hours before the first day of 2009. Feelings of being unfairness surely would come out.

Another area where feelings of unfairness enter is the questions of tax foreclosures. During the economic downturn, more Americans are losing their homes to tax foreclosures because of job losses and other family troubles. But unfortunately, they are not included in the assistance program. Their case is even more difficult because they have only 10 days to settle their taxes before their homes are lost to tax foreclosures. Oftentimes also, homes lost to tax foreclosures are easily sold because of the bargain prices attached to them.