Congress has created a new, temporary tax credit to provide an incentive for first-time homebuyers.  The $7,500 credit will be available for the purchase of a principal residence on or after April 9, 2008 and before July 1, 2009.

Tax credits are special provisions that reduce income tax liability on a dollar-for-dollar basis and claimed on an individual's income tax return.  Thus, if after figuring out all the income items and exemptions and making all the required additions, subtractions, deductions and other items on a tax return a person has a total tax liability of $8,000, a $7,500 credit would wipe out all but $500 of the tax due. 

If your entire tax liability for the year was less than $7,500, say $6,000, the homebuyer would receive a tax credit refund of $1,500. 

A word of caution!  This tax credit essentially serves as an interest-free loan to be repaid over 15 years.  Consult your tax attorney, accountant, or go to http://www.federalhousingtaxcredit.com/ for details.

Note:  A first-time homebuyer is defined as an individual who has not had an ownership interest in a principal residence in the past three years.  The three-year period is measured as the date of the purchase of the eligible principal residence.