Is There A First-Time Home Buyer Tax Credit?

There are many expenses that go into homeownership, especially if you’re buying for the first time. In addition to the down payment and other closing costs, there’s the mortgage payment, property taxes, homeowners insurance and ongoing maintenance. One way governments have made achieving homeownership easier is through a first-time home buyer tax credit.

A tax credit is a dollar-for-dollar reduction in the income tax you owe to your federal, state or local authorities. For example, if you qualify for a $500 tax credit, that means your tax bill will be $500 lower. Moreover, many times, the credit can be used to get a refund on your taxes if the credit amount is higher than your overall tax bill.

The 2008 first-time home buyer tax credit existed in a few different forms between 2008 – 2010. Passed into law as part of the Housing and Economic Recovery Act of 2008 on July 30 of that year, the original act provided first-time home buyers with the equivalent of an interest-free loan of 10% of the purchase price up to $7,500.

With limited exceptions, the credit was to be repaid over a period of 15 years. The full amount would be due if the home was sold during that time.

In November 2009, Congress extended the applicability of the tax credit to a newly defined class of first-time home buyer. Additionally, the timeframe during which you could get the credit was extended and went up to a maximum of $8,000 depending on income and how you qualified for the credit.

Perhaps most importantly, you didn’t have to repay the tax credit if you maintained the home as your primary residence for 36 months if you bought a home using the credit between 2009 – 2010. The tax credit expired for those who bought homes after May 1, 2010.

An attempt to revive a federal first-time home buyer tax credit was made with the introduction of the First-Time Homebuyer Act of 2021. This was introduced in late April of that year in the House of Representatives. Although the legislation never made it out of committee, it attempted to reinstate much of the same policy available under the former credit.

The credit in the act allowed for 10% of the purchase price up to $15,000 to be applied as a tax credit. You had to be a first-time home buyer, defined in the act as someone who hasn’t owned residential property in the last 3 years. You had to be purchasing a primary residence and there were income limitations.

Because there’s now a new term of Congress, the bill would have to be reintroduced in order to see action taken on it. There is no first-time home buyer tax credit at the federal level at this time. However, there may be something available from states and local municipalities. Consult a tax advisor about regulations in your area.

It’s important not to confuse tax credits with tax deductions. While a credit is a one-for-one lowering of your tax bill, a deduction lowers your taxable income. For example, a $500 deduction means that if your original taxable income was $60,000, your taxable income after the deduction would be $59,500. While your taxes may be reduced, they won’t necessarily be $500 less.

There are many tax deductions for homeowners. While we’ll cover deductions you can take at the federal level, there may also be deductions you can take at the local and state level.

• Mortgage interest deduction: If you’re buying a home today, you can deduct the interest on mortgage balances up to $750,000 ($375,000 if married and filing separately). If your home was purchased prior to April 1, 2018, the limit is $1 million for joint filers and $500,000 if married filing separately.
• Property tax deduction: You can deduct local real estate taxes from your federal income taxes. This is lumped in with other deductions you can take for state and local income or sales taxes as well as state and local personal property deductions. In any event, you can’t deduct more than $10,000 ($5,000 if married filing separately) across these categories.
• Origination fee deduction: You can deduct points paid for the cost of originating your mortgage. In most cases, you have to deduct this cost over the life of the loan instead of all at once in the year you purchase. Consult a tax advisor on your situation.

While not a deduction, there are also residential energy credits you can take for the purpose of making your home more energy efficient. There are a couple of different programs here. The first allows you to take a credit of 30% of the cost of qualified improvements like solar or wind electricity generation, biomass fuel, or geothermal heat pump.

The second credit is geared more toward smaller scale energy improvements like replacing windows and doors or putting in new insulation. Consult a tax advisor for more details.

While there is no federal residential purchase credit, there are other options for first-time home buyers looking for assistance.

HUD Assistance

The U.S. Department of Housing and Urban Development (HUD) offers various types of homeownership assistance to those looking to purchase a home. One of the biggest things they can help first-time home buyers with is housing counseling. This involves taking a hard look at your financial situation so that you know how much you can afford and that you’re ready to move forward.

Mortgage Credit Certificates (MCCs)

State housing finance agencies can work with the federal government to convert some of their funding into mortgage credit certificates. These allow low-to-moderate income Americans to claim a credit for a portion of the mortgage interest they pay every year. The calculation is a little complicated, so speak with a tax expert if you have any questions.

State-Sponsored Assistance

States sometimes offer their own assistance programs of various sorts to help their residents achieve homeownership. It’s a good idea to do some research on what may be available in your area. A good place to start is a directory of Local Homebuying Programs maintained by HUD.

Borrow From An IRA Or Roth IRA

If you have a regular or Roth individual retirement account, you would typically have to pay a 10% penalty in additional taxes on any withdrawal you make before age 59½. However, there’s an exemption that could benefit first-time home buyers.

Qualifying first-time home buyers can take out up to $10,000 of distributions in order to buy, build or reconstruct a first home.

For the purposes of this section of the tax code, a first-time home buyer is defined as anyone who hasn’t owned a primary residence in the 2-year period leading up to the acquisition date for the home. Also, you have to use the funds to purchase or build the home within 120 days of taking them out.

Although there’s no additional tax penalty, distributions you take are subject to regular income tax regulations. Speak with a tax advisor about your situation.

Loan From Employer-Sponsored Plans

In addition to the IRA carveout, it’s legal for your employer to offer loans out of retirement accounts that they sponsor. While employers aren’t required to offer these loans, it’s something to look into. The IRS says you can borrow up to 50% of your vested account balance or $50,000, whichever is less.

Normally, the loan out of your retirement plan has to be paid back into the plan within 5 years with a minimum of quarterly payments. However, an exception can be made if you’re buying a primary residence to pay it off over a longer period.

You’ll want to be careful with this. If you leave the company, the terms of your plan loan may call for immediate repayment. Additionally, if you don’t make payments, it may be treated as an early distribution and subject to a 10% tax penalty if you take the money before age 59 ½ in addition to regular income taxes that would apply.

We can’t say this enough. Talk to a tax advisor.

While there have been past credits available and some recent attempts to revive them, there is currently no first-time home buyer tax credit available at the federal level. However, that doesn’t mean there aren’t options available in your state. States also have the ability to issue Mortgage Credit Certificates that can be used to lower your income taxes dollar-for-dollar.

Additionally, deductions can lower your tax liability, even if they don’t do so on a one-to-one basis. Finally, you can look at everything from state-sponsored assistance to taking a loan from retirement plans. If you choose to go the latter route, consult a tax expert.

If you’re ready to think about financing, you can start your mortgage application or give us a call at (833) 326-6018.