Congress passed the Foreclosure Prevention Act of 2008 (H.R. 3221) on April 10, 2008. It was originally introduced as The Renewable Energy and Energy Conservation Tax Act in July of 2007, and was later amended by S. 2636 to become The Foreclosure Prevention Act of 2008 ("Act").

According to Section 25E of the Act, any individual that purchases a "qualified principal residence" is allowed a tax credit of $7,000. Tax credits reduce income tax liability on a dollar for dollar basis and should be claimed on an individual’s tax return.

In this case, Congress created a tax credit for individuals who purchase foreclosed properties.

The total tax credit of $7,000 is to be divided equally between the two years following the purchase of the home. The taxpayer may claim the first $3,500 tax credit in the taxable year the purchase of the residence is made, and the remaining $3,500 credit may be claimed the following year.

A "qualified principal residence" is defined in the Act as a single-family residence that is purchased to be the principal residence of the taxpayer. Generally, a principal residence is the home where an individual spends more than fifty percent (50%) of his/her time. The single-family structure must be a residence upon which foreclosure has been filed, and must either (i) be a new previously unoccupied residence for which a building permit was issued and construction began on or before September 1, 2007, or (ii) be occupied as a principal residence by the mortgagor for at least one (1) year prior to the foreclosure filing.

In the case of married individuals who make a joint purchase of foreclosed property, the couple may claim a single $7,000 tax credit that is split between both spouses. Each spouse may claim a $3,500 tax credit to be divided equally between the two years following the home’s purchase. In the taxable year in which the home is purchased, each spouse may claim a $1,750 tax credit. The remaining $1,750 per spouse may be claimed the taxable year following the purchase of the home.

There are limitations on the foreclosure tax credit. The credit may be claimed on purchases made between April 11, 2008 and April 10, 2009. Further, an individual may only claim one $7,000 tax credit; thus, once a tax credit is claimed, no additional foreclosure tax credit is allowed with respect to the purchase of any other residence by such individual or a spouse of such individual.