Homebuyer Tax Credit Boosts Economy

Written by Broderick Perkins

A new survey reveals that savvy consumers cashing in on the new and improved homebuyer tax credit are helping fuel economic recovery.

The vast majority of current homeowners say they would spend the expanded version of the homebuyer tax credit on repaying existing debts, home improvements, savings and investments and household expenses, according to a National Association of REALTORS® survey of 1,000 homeowners.

Paying off debts affords consumers more spending power, home improvements likewise put more equity money in their pockets and savings and investments generate income.

Consumer spending, of course, is the real fuel for the nation’s economic engine. And much consumer spending is fueled by the housing market — provided the housing market is energized.

Helping to energize the housing market and the economy is the idea behind the homebuyer tax credit and it’s recent extension and expansion.

By October 2009, before President Obama signed the latest extension and expansion, more than 1.2 million tax returns had claimed about $8.5 billion in the refundable tax credit, for both new and resale homes – according to the Treasury Inspector General for Tax Administration (TIGTA).

The new law extends the existing credit for first-time homebuyers, worth up to $8,000, through April 30, 2010.

A new credit of up to $6,500 is available to qualifying existing homeowners who buy a new primary residence (or have one built) by April 30, 2010, if they owned their existing home for five consecutive years over the last eight years. Second homes don’t qualify.

The new rule also raises the qualifying income limits to $125,000 for single taxpayers and $225,000 for joint taxpayers, from the current $75,000 and $150,000.

The maximum allowed home purchase price is $800,000.

More information is available from the Internal Revenue Service (http://www.irs.gov/), including its question and answer page.

As a tangible asset with a host of other tax breaks and the potential for equity gain, a home is often a consumer’s most valuable asset.

As the economic theory goes, when more consumers buy homes, the economy gets a boost.

NAR’s survey appears to confirm the theory.

Among those surveyed, 83 percent said if they purchased a home and qualified for the tax credit they would engage in “smart spending” on things that could ultimately increase income available for spending.

Only 6 percent said they would squander the money on luxury items such as vacation or shopping spree.

According to the survey most consumers would spend their tax credit:

  • To pay off debts (34 percent). Paying off debts leaves more money to spend or save and invest for returns that again generate spending money.
  • To make home improvements and potentially increase the value of their home and home equity (29 percent). Home equity, can be a way to consolidate other, more expensive debt or spend further on capital improvements that generate more returns on the money.
  • To put into savings and investments (28 percent). Saving and investing for returns is a much better personal financial approach than using credit for purchases.

The survey also found, after learning about the tax credit expansion, 20 percent of those surveyed said they were more likely to consider purchasing a home than they were six months ago.

Of course, what will happen when the tax credit expires in 2010, without another extension, is anyone’s guess.

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