What is the first-time homebuyer tax credit?

The first-time homebuyer tax credit was an Obama-era program that directly reduced the amount of tax owed by qualifying homebuyers. This particular incentive ended in 2010, and while President Trump has indicated a desire to increase housing affordability, he has not discussed reintroducing this tax credit.

In the meantime, first-time homebuyers and existing homeowners can still benefit from other federal and state programs, including grants and tax deductions.

Homeowner tax benefits

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 available only 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. Our mortgage tax deduction calculator can help you estimate.
• Mortgage points: Prepaid interest (points) to lower your mortgage rate might be deductible either in the year you purchased the home or over the loan’s term.
• Home office expenses: If a portion of your home is exclusively used for business, you may deduct certain costs — such as maintenance and utilities — for that specific area.
• Capital gains: If you sell your primary residence for a profit, you may be able to deduct up to $500,000 of that profit if you file a joint return, and up to $250,000 if you file separately.

Remember that a tax 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.

Although the above are tax deductions, you may also receive a tax credit for up to $3,200 for making qualified energy-efficient home upgrades.

Who qualifies for first-time homebuyer tax credits?

Although the definition of a first-time homebuyer seems obvious, it might be more inclusive than you think — 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:

• 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

Other first-time homebuyer tax credit requirements

When there was a tax credit for first-time homebuyers, you had to meet further requirements:

• Could not have used the tax credit previously: Buyers could only file for the tax credit once.
• Have an income within certain limits: A full credit was available to homebuyers with incomes in a lower bracket, while a reduced credit was available to higher income buyers. Above a certain income, buyers did not qualify for the credit.
• Must have been at least 18 years old: First-time homeowners were required to be at least 18 years old by the purchase date of their property or married to a person who was at least 18 years old.
• Could not purchase a home from a relative: Homebuyers weren’t allowed to purchase a home from a direct relative, which included a spouse, parent, child, aunt, uncle, cousin or grandparent.

More savings for first-time homebuyers

A tax credit for first-time homebuyers isn’t the only way to save money on your first home. First-time homebuyer loans, down payment assistance, homebuyer grants and other programs can also cut down on the initial expenses of buying a primary residence. Here are some options:

• Mortgage credit certificates (MCCs): With MCCs, you can claim a refund, up to $2,000, based on some of your mortgage interest. Ask your state housing finance agency if you qualify. You may have to pay an upfront fee, which varies by state.
• 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: Every state offers assistance for first-time homebuyers who meet specified criteria, ranging from grants to forgivable loans to down payment assistance. Check your state’s housing finance agency (HFA) for incentives.
• Fannie Mae or Freddie Mac programs: Through lenders, these mortgage market-makers offer affordable, specialized loan programs with generous terms to help first-timers. Fannie Mae’s HomeReady is one example.
• FHA loans: These government-backed loans offer more lenient qualifying criteria than conventional loans and a minimum down payment of 3.5 percent. You may also qualify for a VA loan if you’ve served in the military.