Thinking about buying new home in today’s beaten-down real estate market? You could end up with as much as $18,000 in government tax credits stemming from proposals to jump-start the economy.A state tax credit worth up to $10,000 started Sunday as a way to encourage people to buy new homes, something they have not been doing much of in the last three years.

The credit, which was included in the recently-passed state budget, applies to new single-family houses, condominiums and townhouses that close escrow between March 1 and Feb. 28, 2010, or until funding for the $100 million program runs out.

First-time buyers who take the state tax credit can also qualify for up to an $8,000 federal income-tax credit that applies to the purchase of all homes, new and existing, foreclosed or not. The federal credit applies to homes purchased between Jan. 1 and Nov. 30, 2009.

The state credit is equal to five percent of the home’s purchase price, up to a maximum of $10,000, which will be paid out over a period of three years.

Most buyers will qualify for the $10,000 credit since most home purchases in California are likely to be $200,000 and above. The $100 million in funding would be enough to provide 10,000 home buyers with a $10,000 tax credit.

“This is something that our industry has been desiring to have for quite some time,” said Layne Marceau, president of the Northern California division of Shea Homes. “The whole intentis to stimulate sales activity.”

An uptick in new homes sales would reduce a backlog of unsold new homes, which in turn lead to increased building activity that would stimulate the economy, he said.

“We believe the housing industry is the catalyst to start that,” Marceau said.

A similar federal tax credit helped revive an earlier slowdown in the housing market back in 1975, he said.

The home-building industry is hoping that the tax break will prompt people to consider a new home purchase over a bargain-priced foreclosure, which accounted for 54 percent of existing home sales in January in the Bay Area.

“I think a lot of people have found they have to be very careful when playing the foreclosure market,” said Marceau. “A lot of them are very discouraged either by the process of trying to secure the home at the price or ultimately the home (needs work)… We hope to see a significant increase in our traffic.”

Word of the tax credit has already led to more phone calls being made to new home sales offices, said Tim Coyle, senior vice president for government affairs at the California Building Industry Association, an industry group that pushed to for the state tax credit.

“We are beginning to see interest among those people who we desperately need to have the confidence to return to the housing market,” he said.

In January, only 340 new homes were sold in the Bay Area, a drop of 48.2 percent from a year ago, while the median price was $438,500, a 20.3 percent drop. (The median sale price for all homes, new and existing, was $300,000 in January, or 45.5 percent less than a year ago.)

New home sales volumes were the lowest for a January since MDA DataQuick started keeping track in 1988. Last year was the lowest on record for new housing starts in California since records were kept starting in 1954. Just under 66,000 new houses, condominiums and apartment units went up in 2008, a 68 percent drop from 2005.

While home-buying tax credits can help consumers, it will not change how KB Home set prices, said Chris Apostolopous, the builder’s Northern California division president. Prices won’t go up or down as a result, he added.

“It’s more of a tool for the consumer to analyze if this is something that provides additional encouragement for them to purchase or not,” he said. “Our pricing strategy is based on what the resale market is doing.”

Dianne Crosby, a senior loan consultant at LaSalle Financial Services in Oakland, would have liked to have seen both new and existing homes qualify for the state tax credit.

“A pervasive source of malaise in the Bay Area real estate industry lies with the inventory of foreclosed and bank-owned properties,” she wrote in an e-mail. “These homes, often in poor condition or abandoned, bring down the value of similar homes in the neighborhood and can be harder to finance because of their poor condition.”

Eve Mitchell covers real estate and personal finance. Reach her at 925-952-2690 or emitchell@bayareanewsgroup.com

Comparing the State and Federal Housing Tax Credits
The state home buyer tax credit (up to $10,000) and the federal credit (up to $8,000) can be used together, but there are conditions that must be satisfied:
The state home buyer tax credit applies only to new, previously unoccupied homes.
The federal tax credit is limited to first-time home buyers (defined as not owning a home in three or more years). The full credit is for individuals with annual incomes below $75,000 and joint filers with annual incomes below $150,000. The credit is reduced for individuals with incomes from $75,000 to $95,000 and joint filers with incomes from $150,000 to $170,000.
Both the state and the federal home buyer tax credit require the purchaser to maintain occupancy of the home for a period of time following the purchase – two years for the state and three years for the federal credit. Both tax credits must be repaid if the purchaser fails to meet these occupancy requirements.
Source: California Building Industry Association, Internal Revenue Service
For more information about the federal credit, go to www.irs.gov or call 1-800-829-1040.
For more information about the state credit, go to www.ftb.ca.gov or call (800) 852-5711.