Is There a Tax Credit for First-Time Home Buyers?
Many millennials grew up hearing about a tax credit for first-time homebuyers. Unfortunately, this credit no longer exists. It was an early Obama administration initiative that was implemented in 2008, over a decade ago. The credit expired by 2010, but ever since that time, it has continued to spark the question of whether a federal first-time homebuyer credit still exists.
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Who Qualified for the New Homebuyer Tax Credit?
Obama’s first-time homebuyer credit was created in order to help reinvigorate a flagging housing market in the early days of the Great Recession. It was implemented under the Housing and Economic Recovery Act (HERA). Initially, the credit was set at $7,500, although that cap was raised to $8,000 the following year.
While it was in existence, the specific wording of the credit was changed more than once, and depending on the homebuyer’s timing, it worked as a genuine tax credit or an interest-free loan that had to be repaid over time.
The concept was to provide this credit to new home buyers in order to enable them to afford a primary residence. The term first-time homebuyer was defined in 2012 by the U.S. Department of Housing and Urban Development as:
- Someone who did not own a primary residence during the three-year time span before they purchased the new property. (If one member of a couple meets this requirement, it counts for both.)
- A single parent who only previously owned a house with a spouse while they were married.
- A displaced homemaker who has only ever owned a home with a spouse.
- An individual who only owned a primary residence that lacked a permanent foundation — although this has to meet certain applicable regulations.
- Someone who owned a property that was not up to code and couldn’t be repaired for less than the cost of building a permanent structure.
If someone qualified as a first-time homebuyer, they were able to claim the credit.
Are There Similar Resources Available?
While the Obama-era credit expired a decade ago, there are many other tax incentives, deductions, and credits that have filled the void since that time. Here are a few options that prospective first-time homebuyers should consider in order to offset the costs of purchasing a home:
While there may not currently be a federal first-time homebuyer program, there are still many other home-related tax credits that exist on both the state and federal levels.
New York State, for instance, has the State of NY Mortgage Agency (SONYMA) that is tasked with both informing first-time homebuyers and helping them secure funds for down payments. When investigating this option in your own state, look for conditions such as an income threshold for first-time homebuyer qualifications — the threshold may affect your eligibility.
The IRS also has an ongoing list of energy-efficient products that serve as clean energy incentives under the American Recovery and Reinvestment Act. Many of these are related to a home and can be claimed if you make energy-efficient updates to your residence.
Along with tax credits, there are many tax deductions that should be considered, as they can reduce your total amount of taxable income. The two primary deductions that are related to homeownership are a property tax deduction and a mortgage interest deduction.
Property tax is a sum of money you pay yearly to your state and local government in exchange for owning property. Because this is a state tax, the federal government offers a tax deduction to homeowners. Make sure to gather your property tax receipts when you prepare to file your taxes, as this sum may be deducted when your federal taxes are calculated.
Mortgage interest is another deduction that can come in handy if you itemize your tax return. Mortgage interest is the interest paid on loans used for purchasing, building, or improving your residence. This interest can be deducted from your taxes as a home mortgage interest deduction.
As a final note on credits and deductions, remember that credits represent a set dollar value that lowers the total amount that you owe on your taxes. Deductions, on the other hand, only reduce the amount of taxable income.
Deductions should be taken with a grain of salt if you’re likely to use the standard deduction on your tax return. The recent change in the standard deduction to $12,000 for individuals and $24,000 for those who are married filing jointly has made the use of itemized deductions less common.
Along with the credits and deductions listed above, first-time homebuyers should consider a few other alternatives.
An IRA is one option if you’re looking for funds for a down payment. You are allowed to withdraw up to $10,000 out of an IRA (and twice that much for couples) without invoking the 10% early withdrawal penalty when purchasing your first home. If the sale or construction doesn’t go through, you can return the funds to your IRA within 120 days to avoid the penalty..
It’s also worth visiting the HUD website in order to see what incentives, grants, and other programs are currently being promoted for first-time homebuyers. FHA loans, for instance, are offered by the Federal Housing Administration to help homebuyers receive better deals on a mortgage.
If you’re a Native American first-time homebuyer, you should also consider looking into a Section 184 loan, which is specifically designed to help American Indian and Alaskan Native families purchase their first residences.
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