Is there a first-time homebuyer tax credit?

The government offers federal and state tax breaks to homebuyers in order to keep the housing market strong and encourage people to buy homes. One such incentive was the Obama-era first-time homebuyer tax credit, which offered qualified homebuyers a credit of up to $8,000. Unfortunately, that tax credit no longer exists, but there are still tax breaks available for those buying a home in 2024.

First-time and seasoned homebuyers alike can take advantage of a number of credits and deductions as long as they know where to look and how to file their taxes. Plus, there’s some hope that a stronger first-time home buying tax credit will return if the First-Time Homebuyer Act, introduced to Congress in 2021, is passed into law. However, the bill was not enacted in 2023 and has not been enacted at the time of writing.

Biden’s $15k first-time homebuyer credit

Introduced in April 2021 by several Democratic members of Congress, the First-Time Homebuyer Act of 2021 aims to bring back the Obama-era tax credit for first-time home buyers from 2008.

Under the proposed bill, eligible homebuyers could receive a tax credit of up to 10% of their home’s purchase price, up to $15,000.

The bill failed to pass Congress and has yet to be signed into law, and although the details can change before it is, current eligibility requirements are:

• You cannot have owned a home or co-signed a mortgage within the past three years. This includes both primary residences and second properties.
• You cannot use the tax credit more than once. However, homeowners who used the 2008 first-time homebuyer tax credit may be eligible for this credit.
• Homebuyers cannot have an income more than 60% above the median income in their desired purchase location. Income requirements are higher for joint filers and individuals with multiple income streams.
• First-time homeowners must be at least 18 years old.
• Homebuyers cannot claim the credit if they purchased a home from a direct relative.

The new tax credit stands to work similarly to the 2008 credit. Eligible homebuyers may receive a refundable tax credit equal to 10% of their home’s purchase price — up to $15,000. Once received, the tax credit would automatically apply to your federal tax bill without a formal application. However, you might have to file a separate IRS form with your federal tax return.

The proposed bill says that if you own your house for at least four years, you don’t have to repay the tax credit. 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. (Keep this in mind when considering how soon to sell your home after buying it.) There are exceptions for death, divorce, military transfers, and transactions in which you profit less than your tax liability.

What tax breaks do you get for buying a house?: Common tax credits for homeowners

Pending the passage of the First-Time Home Buyers Act, there aren’t many great tax credits for just first-time home buyers. State programs exist, but they’re rarely as compelling as federal offers. In the meantime, however, homeowners can leverage a number of credits and deductions to help save a little money come tax time.

In contrast to tax deductions, tax credits are deducted directly from the taxes you owe. While there are relatively few tax credits specific to first-time home buyers, all homeowners have access to a litany of tax credits and tools to save money. Here are some of the most common:

Mortgage interest credit

Lower-income homeowners who were issued a qualified mortgage credit certificate (MCC) from a state or local government to subsidize their home purchase may claim a mortgage interest credit in addition to the interest deduction. The mortgage interest credit ranges from 10% to 50% of mortgage interest paid during the year and capped at $2,000 if the credit rate is higher than 20%.

This credit has many rules and restrictions, the biggest being that you need a qualified MCC. Also, you can’t claim the credit more than once, so if you claim the mortgage interest credit, you must reduce your mortgage interest deduction by the credit amount.

Energy-saving improvement credits

Go green, get rewarded. If you install certain energy-efficient equipment in your home, you can save 30% on qualifying energy efficient improvements like installing energy efficient insulation, exterior doors and windows, heat pumps or biomass stoves and broilers, electric or natural gas water heaters, and home energy audits. Eligible homeowners can generally claim up to $1,200 annually.

→ Learn more about residential energy credits

The home sale tax exclusion

This final credit is for sellers, not buyers, but it’s worth knowing. When you sell your home, you may be entitled to write off up to $500,000 ($250,000 for single filers) of profit. The Home Sale Tax Exclusion protects you from capital gains tax if:

• You’ve owned the home for at least two of the past five years.
• You’ve lived in the home for at least two of the past five years.
• You haven’t used the exclusion to shelter gain from a home sale in the last two years.

The IRS doesn’t give many gifts, but this is a big one. So if you’re buying a home in a hot market, bear in mind you have to stay there for a while before trying to flip it. Otherwise, you’ll get hit with a hefty capital gains tax bill.

Common tax deductions for homeowners

Tax deductions lower your taxable income and the rate at which you are taxed, resulting in a larger refund. Here are some of the most common tax deductions for homeowners:

• Property tax deduction: The most common tax break for homeowners is the property tax deduction. Property taxes range wildly from place to place and can make up a significant portion of your mortgage payment. Most homeowners, however, can deduct some of those taxes.
• Mortgage interest deduction: If you itemize your deductions rather than take the standard deduction, you can deduct interest on up to $750,000 of debt if you’re married ($375,000 if single) used to buy, build, or substantially improve your primary home or a second home. You can also claim mortgage points as a part of this deduction.‍
• Home office expense deduction: If you work at home, you can deduct anything you use regularly and exclusively for work. The simplified home office deduction calculation deducts $5 for every square foot of space in your home used for qualified business purposes. Technically, though, you’re entitled to deduct part of your utility bills, insurance costs, materials, general repairs, and much more that will easily surpass $5 per square foot.‍
• Rental expenses deduction: If you rent out part of your home, you must pay taxes on your rental income, but you can also deduct expenses for managing the rental space. Expenses like insurance, maintenance costs, real estate taxes, utilities, and supplies all count as deductible.

Other ways for first-time homebuyers to save

While Biden’s first-time homebuyer credit is the biggest first-time homebuyer tax credit, it isn’t law yet. So, if you’re looking to buy your first home in the near future, you’ll need to look elsewhere for tax breaks.

Most states offer first-time homebuyer programs that include tax credits, and may even provide zero-interest loans and grant money to put toward a down payment.

In Texas, for example, the Texas State Affordable Housing Corporation offers mortgage tax certificates that let you deduct a large portion of your mortgage interest on your annual federal tax return.

Most state programs have a maximum limit on income and property value since they cater to lower-income buyers, but they’re worth checking out to see if you qualify.

If you have a Roth IRA or traditional IRA, first-time homebuyers are also allowed to take up to $10,000 out of their accounts to buy a home. Each account has different rules and tax consequences, so if you need a little extra help with your down payment, discuss this tool with your real estate agent before pursuing it.