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A first time homebuyer is someone who has not owned a home in the preceding three years. All homes, whether single-family, town homes or condominiums or new construction will qualify, however it must be used as the taxpayer’s primary residence.

The tax credit is for 10% of the purchase price, up to $7,500, but phases out for higher-income homeowners. Homebuyers who file as single or head-of-household can claim the full $7,500 if their adjusted gross income is less than $75,000.  For married couples filing a joint return, the income limit doubles to $150,000.  Homeowners are eligible for the tax credit if they have purchased a home since April 8, 2008 or make a purchase before July 1, 2009. 

This is a tax credit, not a deduction. It reduces the homeowners' tax bill by up to $7,500 for the tax year in which the purchase was made. If you pay less than $7,500 in federal income taxes, then the government will write a check for the difference in the same manner as an overpayment of your taxes..  If a house is purchased this year, a tax credit for the 2008 tax year can be taken with a filing deadline of April 15, 2009. If a house is purchased next year by the end of June, a tax credit for the 2009 tax year can be taken in the April 15, 2010 filing. It's a one-time credit; you don't get to keep taking it year after year.

There is a catch, and that is that the money has to be repaid over 15 years, starting two years after you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you'll have to pay Uncle Sam the remaining balance.