What is the first-time homebuyer tax credit?

Tax credits are a way for the government to offer financial incentives to taxpayers for doing certain things. They directly reduce, dollar-for-dollar, the amount of tax you owe when you file your tax return. But what is a first-time homebuyer tax credit? As the name implies, a first-time homebuyer tax credit offers this sort of tax break for people who’ve never owned a home before.

While this particular incentive ended 13 years ago, a similar tax credit bill is making its way through Congress. In the meantime, first-time homebuyers can still benefit from various other federal and state assistance programs offering credits, deductions and other forms of aid to make homeownership more affordable. Here’s what you need to know.

First-time homebuyer tax deductions

A tax credit for first-time homebuyers is a powerful way to save money on your first home, but it’s not the only way to reduce your expenses. First-time homebuyer loans, down payment assistance and other programs can cut down on the initial expenses of buying a primary residence.

You may also save on upfront costs using a government-guaranteed FHA loan or VA loan. These programs don’t offer a tax credit or deduction but often involve a low or no down payment and other special accommodations that make it easier to afford homeownership.

One of the best ways to offset the costs of buying a property is to tap into available tax deductions. Keep in mind that most of these are only available to people who are using the property as their primary residence, and you must itemize deductions on your return.

Here are some of the costs that can be deducted after buying a home:

• Property taxes: You can deduct property taxes up to $10,000 on your federal return.
• Mortgage interest: You can deduct your mortgage interest on your taxes, up to the first $750,000 of debt, or $375,000 if filing separately (but married). (Our mortgage tax deduction calculator can help you estimate.)
• Loan origination fees/mortgage points: While this benefit expired in 2022, if you paid your premiums before Dec. 31, 2021 and met certain criteria, you might have been able to deduct these up-front expenses when financing your home purchase.

Who qualifies for first-time homebuyer tax credits?

Although it seems obvious what a first-time homebuyer is, there is actually a technical definition of it — at least as far as many government agencies and programs are concerned.

According to the U.S. Department of Housing and Urban Development (HUD), you may qualify as a first-time homebuyer if you meet the following requirements:

• Have not owned a home or been a cosigner on a mortgage in the previous three years
• Are a single parent who only co-owned a property with a former spouse while married
• Are a displaced homemaker who has only owned a home with a spouse
• Have only owned a home not permanently affixed to a foundation
• Have only owned a home that is not in compliance with state or local building codes and that cannot be brought into compliance for less than the cost of building a permanent structure

As you see, you could count as a first-timer even if you have technically held title to a property before and still be eligible for a first-time homebuyer tax credit.

Tax credits can be a stronger incentive than a first-time homebuyer tax deduction. A deduction only decreases your taxable income — the amount your taxes will be calculated on. In contrast, a credit directly cuts the amount of tax you pay.  For example, if you owe $10,000 in federal taxes but receive a $1,000 tax credit, that reduces your tax bill to $9,000.

Other first-time homebuyer tax credit requirements

The tax credit for first-time homebuyers wouldn’t be available to everyone. You’d need to meet the following requirements:

• Must be a first-time homebuyer: You cannot have owned a home or co-signed on a mortgage within the past three years. This applies to primary residences and second homes.
• Cannot have used the tax credit previously: Homebuyers can only use this tax credit once. However, homeowners who used the 2008 first-time homebuyer tax credit would be eligible for the 2021 credit.
• Must meet income requirements for your area: Homebuyers must have an income that is no more than 160 percent above the median income for their location.
• Must be at least 18 years old: First-time homeowners must be at least 18 years old by the purchase date of their property or married to a person who is at least 18 years old.
• Cannot purchase a home from a relative: Homebuyers aren’t allowed to purchase a home from a direct relative, which includes a spouse, parent, child, aunt, uncle, cousin or grandparent.

More savings for first-time homebuyers

You may also qualify for certain credits and money-saving programs based on how you fund your purchase. There are also programs designed to benefit people with energy-saving homes. Some homeowners also qualify for IRA withdrawals to come up with a down payment, and your state may provide first-time homebuyer credits for new owners.

• Mortgage Credit Certificates (MCCs): If your state offers MCCs, you can claim a refund, up to $2,000, based on some of your mortgage interest. Check with your state housing finance agency to find out if your state offers them or if you qualify.
• IRA withdrawals: If you haven’t bought a home in two years, you can remove up to $10,000 from your IRA for a home purchase without paying penalties. However, you may be liable (depending on the type of IRA) for taxes on your withdrawals. You can also consider borrowing from your 401(k) account.
• State programs: Most states offer assistance for first-time homebuyers who meet specified criteria, ranging from grants to forgivable loans to down payment assistance. Check with your state’s housing finance agency (HFA) for new homebuyers incentives.
• Energy credits for smart homes: Making your house more energy efficient can pay off in more ways than one due to the passage of 2022’s Inflation Reduction Act, which offers incentives for installing solar panels, energy-efficient appliances, and other retrofits.
• Fannie Mae or Freddie Mac programs: These mortgage market-makers offer affordable, specialized loan programs with generous terms to help first-timers.

History of first-time homebuyer tax credit policies

2008 Federal First-Time Homebuyer Tax Credit

The impact of the Great Recession on the U.S. economy was vast: It decimated the housing market and impacted many people’s ability to buy a home. Starting with the Housing and Economic Recovery Act of 2008, a series of federal tax credit programs were established for first-time buyers between April 9, 2008, and September 30, 2010.

Originally the incentive was to end on July 1, 2009, but the Obama Administration extended it. Then, the American Recovery and Reinvestment Act of 2009 expanded the first-time homeowner credit and increased the income eligibility of the previous tax credit.

Under the original program, qualified individuals originally were given a tax credit for 10 percent of the home’s purchase price, up to $7,500 (later increased to $8,000), which had to be repaid in equal installments over 15 years. Under the 2009 extension, the repayment requirement was no longer required if buyers remained in their homes for at least three years.

Homebuyers were eligible for the tax credit if they had never owned a home or they hadn’t owned one in three years. In addition, their annual incomes had to be under the threshold of $75,000 (for single filers) or $150,000 for joint filers to receive the full credit. There were limits on the home’s purchase price, too.

2021 First-Time Homebuyer Act

The First-Time Homebuyer Act of 2021, still in the House of Representatives as of Nov. 2023,  aims to help low- and middle-income Americans purchase property by reinstating the 2008-10 tax credit. Under the new bill, eligible homebuyers can receive a tax credit of up to 10 percent of their home’s purchase price, to a maximum of $15,000. Purchase price limits would be based on area medians.

Should the First-Time Homebuyer Act of 2021 become law, many low- and middle-income Americans would qualify for a tax credit for buying a house. Plus, potentially, the tax credit would not need to be repaid unless you sell the home within the first four years of ownership.