What is the first-time homebuyer tax credit and how does it work?

Buying a home for the first time can be overwhelming, especially if you don’t have any type of information or guide to get you started. As a first-time homebuyer, it’s important you’re aware of ways to reduce your homeownership costs, including any potential tax breaks.

For instance, are you aware of the First-Time Homebuyer Act of 2021? While it’s still awaiting passage in Congress, if passed, the bill will provide a federal tax credit of up to $15,000 to first-time homebuyers.

Keep reading to learn more about the first-time homebuyer tax credit, along with tax credits that you can take advantage of today.

• What is a first-time homebuyer tax credit?
• What is the First-Time Homebuyer Act of 2021?
• Other homeowners tax credits to be aware of

What is a first-time homebuyer tax credit?

For new homeowners already trying to adjust to the many costs involved in homeownership, tax credits offer welcome relief.

"A first-time homebuyer tax credit lowers the amount of income tax that you have to pay on your tax return for the year in which you purchase property," said Rachel Bennett, a licensed agent at Orchard in Austin, Texas. This is in contrast to a tax deduction, which reduces your taxable income.

The first-time homebuyer tax credit was first introduced on July 30, 2007 (as part of the Housing and Economic Recovery Act of 2008) and went into effect on July 30, 2008. It was designed to help stimulate the economy by encouraging consumers to buy homes.

In its first iteration, the first-time homebuyer tax credit granted first-time homebuyers a tax credit of up to 10% of the home’s purchase price. The maximum amount that could be claimed was $8,000. There were also other qualifications buyers needed to meet, including citizenship, income, and residency requirements. This tax credit expired in 2010.

What is the First-Time Homebuyer Act of 2021?

On April 28, 2021, Congressman Earl Blumenauer introduced the First-Time Homebuyer Act of 2021. If passed, the bill would provide a federal tax credit similar to the original first-time homebuyer tax credit that expired in 2010.

"This national government program would give a tax credit for 10% of your home’s purchase price, up to $15,000, to eligible taxpayers," said Bennett. "This proposal is still under review and needs to be signed into law by President Joe Biden before it becomes effective."

If you’re looking to explore your mortgage options, be sure to visit Credible to compare loan rates and mortgage lenders.

Who qualifies for this tax credit?

Even if this isn't your first home, you may still qualify for the new first-time homebuyer tax credit — once the legislation is passed.

"The First-Time Homebuyer Act of 2021 would include those buyers purchasing a home for the first time and also buyers purchasing a primary residence who have not owned a home for three years," Bennett said.

However, as Bennett explained, income plays a role in the tax credit as well. "This proposed bill would only support those buyers who have income no more than 160% above the median household income in their area."

The home must be your primary residence in the tax year it’s being claimed, and it must be purchased, as opposed to being acquired. In addition, you can’t claim the tax credit in another year, nor can you sell the home in the year that you try to claim the credit.

WHAT ARE PROPERTY TAXES? A GUIDE FOR FIRST-TIME HOME BUYERS

Other homeowners tax credits to be aware of

There are numerous incentives and grants available to first-time buyers in various states. For example, many states offer down payment assistance programs for first-time homebuyers with certain income limits.

First-time homebuyers may also qualify for the following tax breaks:

• Mortgage Credit Certificate: The MCC program allows you to claim a federal tax credit for a portion of your mortgage interest every year. The exact amount you can claim on your taxes varies by state, but it’s usually between 20% to 40% of the total mortgage interest, up to $2,000.
• Mortgage interest deduction: As a homeowner, you can deduct interest you pay on your mortgage. You’ll need to itemize deductions on your tax return, and it may be limited depending on when you took out the loan.
• Residential energy efficient property credit: This incentive provides you with a federal tax credit if you’ve installed energy efficient equipment in your home. Equipment that qualifies for the residential energy credit includes geothermal heat systems, wind turbines, solar panels and fuel cell property. The credit is equal to a certain percentage of the cost of the equipment and varies depending on when you installed it.