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What is the first-time homebuyer tax credit?

What is the first-time homebuyers tax credit?
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What is the first-time homebuyers tax credit?
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First-time homebuyers tax credits are a government program that helps people purchase their first home. They reduce the tax bill of people who buy a house.

These tax credits are important because they help incentivize homeownership and make it more affordable for many Americans.

What are first-time homebuyer tax credits?

Tax credits are a way for the government to offer financial incentives to taxpayers for acting in specific ways or doing certain things. They directly reduce the amount of tax that you owe when you file your tax return.

For example, if you owed $10,000 in federal taxes, but receive a $1,000 tax credit, that reduces your tax bill to $9,000. This makes tax credits a stronger incentive than a deduction, which lets you decrease your taxable income. Deductions reduce your taxes owed, but not to the same extent as a credit for the same amount.

First-time homebuyer tax credits are credits against federal income taxes that the government offers to people who purchase their first home.

Who qualifies as a first-time homebuyer?

To qualify for the first-time homebuyer tax credit, you have to meet a few requirements. Despite its name, the credit isn’t available only to people who have never purchased a home. You’re considered a first-time homebuyer if you haven’t owned a home or been cosigner on a mortgage at any point in the past three years.

To qualify as a first-time buyer, you must meet any of these requirements:

  • Have not owned a home or been a cosigner on a mortgage in the previous three years
  • Be a single parent who only co-owned a property with a former spouse while married
  • Be a displaced homemaker who have only owned a home with a spouse
  • Have only owned a home 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

Where to find first-time homebuyer credits

Besides the pending federal tax bill, there are several ways that first-time homebuyers can get help.

If you have a Roth IRA or traditional IRA, first-time homebuyers are allowed to take up to $10,000 from their accounts to buy a home. The exact rules and tax consequences depend on the type of account and other factors outlined by the IRS.

Some homeowners can take advantage of Mortgage Credit Certificates (MCCs) to lower their tax bill. This credit is based on the amount of mortgage interest you pay annually and your state. The credit is usually capped at around $2,000.

Depending on where you live, certain states provide tax credits for first-time homebuyers. You can also look into FHA loans, VA loans, energy tax credits, and Fannie Mae or Freddie Mac programs.

What is the First-Time Homebuyer Act of 2021?

The First-Time Homebuyer Act of 2021 was introduced by several Democratic members of Congress in April 2021. This bill would bring back the tax credit, which was first implemented in the wake of the 2008 housing crisis, with many of the same requirements.

However, under the new bill, eligible homebuyers could receive a tax credit of up to 10 percent of their home’s purchase price, with a maximum of $15,000.

The goal of the 2021 new homeowner tax credit is to help low-income and middle-income Americans purchase property, with the goal of building generational wealth in communities of color. As of May 2022, this bill hasn’t been passed into law.

Who would be eligible for the First-Time Homebuyer Act of 2021?

The tax credit for first-time homebuyers wouldn’t be available to everyone. Although the exact eligibility could change before the bill is signed into law, here are the current 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 properties.
  • Cannot have used the tax credit previously: Homebuyers who use the tax credit in 2021 cannot claim the credit again until 2026. 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 60 percent above the median income for their location. The income requirements are higher for joint filers and individuals with multiple income streams.
  • 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.

How would the $15,000 first-time homebuyer tax credit work?

The 2021 first-time homebuyer tax credit would work similarly to the 2008 tax credit.

Eligible homebuyers could receive a loan for an amount that is equal to 10 percent of their home’s purchase price, with a maximum loan amount of $15,000.

Once you receive the tax credit, it would automatically be applied to your federal tax bill. There would be no formal application, although a separate IRS form could be required with your federal tax return.

If you own your house for at least four years, you are not required to repay the tax credit. However, if you sell your home or move within the first four years of ownership, you must pay back a portion of the tax credit, based on the length of ownership. The only exceptions are for death, divorce, military transfers and transactions where your real estate gains are less than your tax liability.

Other tax deductions for first-time homebuyers

Purchasing a home can be very expensive, but homeowners are allowed to deduct some of the costs when they file their taxes. Generally speaking, you can only deduct costs that are paid on an ongoing basis, such as mortgage interest.

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

  • Property taxes
  • Mortgage interest (use this calculator to estimate your deduction)
  • Mortgage insurance premiums
  • Loan origination fees

Bottom line

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

In the meantime, first-time homebuyers should look into programs that are currently available, like FHA loans, MCCs and IRA withdrawals to help lower the cost of purchasing property. If you recently purchased a home, make sure you know what home-related expenses can be deducted, which could help lower your taxable income.

Written by
Elizabeth Rivelli
Insurance Contributor
Elizabeth Rivelli is a contributing insurance writer for Bankrate and has years of experience writing for insurance domains such as The Simple Dollar, Coverage.com and NextAdvisor, among others
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