Legislation providing for a tax credit for first-time homebuyers was introduced in Congress in 2021 but is still making its way through Congress as of June, 2023. A revamp of the first-time homebuyer tax credit from 2008, the proposed First-Time Homebuyer Act of 2021, would modify the first-time homebuyer tax credit, increasing the allowable dollar amount of the credit from $8,000 to $15,000.
Unfortunately, this bill hasn’t passed, so there is currently no federal tax credit for first-time homebuyers. (A separate bill, the Downpayment Toward Equity Act of 2021, was introduced in the House of Representatives and the Senate in 2021, provides financial assistance specifically to first-generation homebuyers to help them purchase a home that they would occupy. This hasn’t passed either.)
Here’s everything you need to know about the history of the first-time homebuyer credit and what the future may hold.
What Is the First-Time Homebuyer Tax Credit?
The first-time homebuyer tax credit refers to a tax credit given in tax years 2008, 2009, and 2010 worth up to $8,000. It’s possible the term may also be used in the future as legislation for a new first-time homebuyer tax credit was introduced in the House of Representatives in April 2021.
The new proposed first-time homebuyer tax credit would typically be worth up to $15,000 for buyers whose adjusted gross income doesn’t exceed 160% of the median income for the area.
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First-Time Homebuyer Act of 2008
For first-time homebuyers who purchased a home between April 9, 2008, and May 1, 2010, a one-time tax credit of 10% of the purchase price, up to $7,500 in 2008 and increased to $8,000 in the next two years, was available. It was part of the Housing and Economic Recovery Act of 2008. The credit was for home purchases of up to $800,000 and phased out for individual taxpayers with higher incomes.
For home purchases made between April 9 and Dec. 31, 2008, the credit had to be repaid over 15 years, making it more of an interest-free loan than a true credit. Homebuyers taking advantage of the tax credit in the following years had repayment of the credit waived. Homebuyers who left the property before a three-year period were required to repay a portion of the credit back to the IRS.
Proposed First-Time Homebuyer Act of 2021
The First-Time Homebuyer Act of 2021 would allow qualified buyers a refundable tax credit of $7,500 for individuals and $15,000 for married couples filing jointly.
This bill amends the 2008 law to allow for higher purchase prices, revises the formulas for income, and revises rules pertaining to recapture of the credit and to members of the armed forces. It was introduced in the House by Rep. Earl Blumenauer of Oregon in April 2021 but is not yet law as of June 2023.
What Can Be Deducted After Buying a Home?
Amounts eligible for the proposed tax credit would include the purchase price of the home. The amount of the credit is 10% of the purchase price.
Given that the maximum is $7,500 per individual and $15,000 per married couple filing jointly, if you and your spouse purchased a home with a mortgage loan of $500,000, the 10% credit would amount to $50,000. You would receive a tax credit of $15,000 if you filed jointly.
If you purchased a home for $102,000 with a spouse, 10% of that would be $10,200. You would be able to claim $10,200 for the credit if you filed jointly.
Here are some possible deductions now for homeowners who itemize, though most taxpayers take the standard deduction instead:
• Mortgage interest on up to $750,000 of mortgage debt (or up to $375,000 if married and filing separately), including discount points paid to reduce the interest rate on the mortgage.
• Up to $10,000 of property taxes when combined with state and local taxes.
• Home office if you’re self-employed or a business owner but not an employee of a company.
If you sell your main home and have a capital gain, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 if you file a joint return with your spouse.
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Who Is Eligible for the First-Time Homebuyer Act of 2021?
First-time homebuyers purchasing a principal residence would be eligible for the tax credit. Not your first time buying a house? You may still be able to qualify.
A first-time homebuyer is defined as someone who has not owned an interest in a property for the past three years. So even if you had owned a home in the past, you might be eligible to receive this credit if it hadn’t been in the last three years.
Other qualifications include:
• A modified adjusted gross income that is under 160% of the area median income.
• Purchase of a property that is not above 125% of the area median purchase price.
• Must live in the home as a principal residence for the tax year.
• Must be over 18 years of age.
To note: If you claimed a first-time homebuyer credit under the 2008 law, you would be able to claim it again. But you could claim the new credit only once, for a first purchase. Also be aware that a copy of the settlement statement must be attached to your taxes.
How Does the Tax Credit Work?
If the bill passed, the new homeowner would file for the first-time homebuyer tax credit on their taxes. The credit would first be used to offset any taxes owed by the homebuyer. Then, as a refundable tax credit, the homebuyer would get money back on top of the amount of the credit after their tax bill had been paid.
For example, if you owed $4,000 in taxes after accounting for withholdings, and you qualified for a $15,000 tax credit, you’d apply that toward the amount you owe in taxes. You would get the rest back ($11,000) from the IRS.
Taxpayers must stay in the home for the duration of the tax year in order to receive the credit. If the property is sold within four years, taxpayers may need to pay a portion of the tax credit back. The amount is subject to a schedule, which is as follows:
• Dispose of property before the end of Year 1: Repay 100% of the credit
• Dispose of property before the end of Year 2: Repay 75% of the credit
• Dispose of property before the end of Year 3: Repay 50% of the credit
• Dispose of property before the end of Year 4: Repay 25% of the credit
Homebuyer Tax Credit vs Homebuyer Grant
Another first-time homebuyer program has been introduced in Congress to help with the costs of obtaining a home. The Downpayment Toward Equity Act would award a grant of up to $25,000 to first-generation homebuyers who come from socially and economically disadvantaged groups.
The down payment would need to be for a principal residence and would not need to be repaid after 60 months of occupancy. More details on the two proposed programs can be found below:
| First-Time Homebuyer Act of 2021 | Downpayment Toward Equity Act of 2021 Grant |
|---|---|
| Available to homeowners who have not owned a home in the last three years | Available to first-generation homebuyers, meaning individuals whose parents do not currently own residential real estate or individuals who have been placed in foster care at any time |
| Credit against taxes of 10% of the purchase price, up to $15,000, available as a refundable tax credit | Up to $25,000 available, and possibly more for high-cost areas |
| For buyers whose income doesn’t exceed 160% of the median income for the area | Income may not exceed 120% of the median income for the area, except in high-cost areas, where the limit increases to 180% |
| Must be a principal residence | Must be principal residence |
| No specified number of units | 1-4 units will qualify |
| Allowed on purchase amounts up to 125% of the median purchase price of a home | Must come from a socially and economically disadvantaged group |
| Must not dispose of the residence before the end of the tax year. Has a schedule for amount of the credit that is recaptured if the home is sold in a certain period of time | After 60 months of occupancy, the grant does not need to be repaid |
| Has been introduced in the House and has been referred to the Ways and Means Committee. Has not passed as of early 2023 | Has been introduced in the House but has not passed as of early 2023 |
| Must be at least 18 years of age | Assistance can be used for the costs to acquire the mortgage as well as home modification costs for those with disabilities |
| Must attach the settlement statement to your taxes | Can be combined with other assistance programs, such as the first-time homebuyer tax credit |
Help for First-Time Homebuyers
Although new federal legislation hasn’t yet delivered support to first-time homebuyers, there are other first-time homebuyer programs that can help with costs.
A first-time homebuyers guide will walk you through the process of buying your first home and help answer questions.
Are you crunching numbers? Try this mortgage calculator tool. Keep in mind that some private lenders (like SoFi) allow a down payment for first-time buyers that may be even lower than FHA loans.
The Takeaway
A first-time homebuyer tax credit of up to $15,000 has been proposed for qualified buyers. That would take some of the pressure of taking the plunge into homeownership. But Congress has not passed legislation to put the credit in place.
If home buying remains mysterious, the SoFi loan help center can help clear the fog.
Photo credit: iStock/monkeybusinessimages
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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