One particular aspect of the national mortgage bill signed by President Bush last week is being touted as helpful for first-time home buyers (or those who haven’t owned for the last three years): a tax credit that’s really a zero-interest loan. Such buyers could receive as much as $7,500, an advance that’s intended to provide an extra incentive to those contemplating a leap into the housing market. It’s available to those who bought as of April and before July 1, 2009.

The National Association of Realtors put together a Q&A to explain how it all works. One caveat: The information is accurate as of July 30 and any questions should be taken to a tax adviser.

Here’s an excerpt of the association’s Q&A:

How does a tax credit work?
Tax credits are special provisions that reduce income tax lability on a dollar for dollar basis. Credits are claimed on an individual’s income tax return. In this case, Congress has created a tax credit for first-time home buyers.

Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is single (or head of household) are eligible for the credit if their income is no more than $75,000. Individuals who file a joint return may have income of no more than $150,000.

Is the amount of the credit tied to the price of the home?
Yes. The credit is for 10 percent of the cost of the home, up to a maximum credit of $7,500. If a home costs $65,000, the allowable credit would be $6,500. If a home cost $120,000, the allowable credit would be $7,500. The amount of the credit is the same for all taxpayers, married or single.

Why do some news reports call this an interest-free loan?
Unlike most other tax credits, this tax incentive must be paid back. All eligible purchasers who claim the credit will be required to repay it over 15 years. The statute specifies that the repayment amount will be 6.67 percent of the credit amount each year. Thus, a buyer who qualifies for the full $7,500 credit will repay $502.50 each year. There will be no interest charge on outstanding balances.

How do I apply for the credit?
There is no pre-purcahse authorization, application or similar approval process. Eligible purcahses will simply claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise. In many, if not most cases, the IRS will be on notice that the purchase has occurred because the settlement officer at the time of purchase is required to report the transaction.

So I can’t use the credit amount as part of my downpayment?
Presently, there is no mechanism available for claiming the credit any earlier than the 2008 tax return that will be filed in 2009. Congress tried to devise a mechanism that would allow pre-funding for the credit, but found that prefunding would require combursome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

When do I make the payment?
The mechanics are not specified. Repayments for credits claimed on 2008 tax returns will go into effect for the 2010 tax year. As a practical matter, then, repayments of credits taken in 2008 will not actually start until 2010 returns are filed in 2011. Repayments for credits claimed on 2009 returns will go into effect for the 2011 tax year and be reflected on 2011 returns filed in 2012.

What if I sell my house before the 15-year repayment period is complete?
When the person who used the credit sells the home, any amount of tax credit that has not been repaid will be due in the year of sale. For example, if an individual still owed $4,000 in repayments and realized $25,000 of proceeds from the sale, the $25,000 of seller proceeds would be reduced to $21,000 and $4,000 will be remitted to the IRS. Again, the mechanics are unknown.

What if there’s very little gain (or even a loss) on the sale and the proceeds won’t cover the repayment amount?
If the gain on the sale is less than the amount that must be repaid, part of the liability is forgiven. For example, if the individual still owed $4,000 but the gain on the sale was only $3,500, then the seller would not be required to repay the IRS the $500 shortfall. If there was no gain or even a loss, then the remaining $4,000 would not be repaid.

The National Association of Realtors also has a chart you can find here that breaks down the basic elements of the tax credit.