One of President Biden’s main campaign promises was to help families purchase their first home by providing a tax credit of up to $15,000. The goal is to help middle-class families lay down roots for the first time and begin building generational wealth.
On April 28, 2021, that promise became a bill called The First-Time Homebuyer Act of 2021. The bill is still before Congress, so it is not yet law. But, if you are a first-time homebuyer, it is important to understand how this bill may be able to help you.
What Is the First-Time Homebuyer Act of 2021?
When it becomes law, The First-Time Homebuyer Act of 2021 will give a tax credit to families buying their first house. While you may read about The First-Time Homebuyer Tax Credit and the First-Time Homebuyer Act, they are the same thing, and we will refer to them interchangeably.
The two essential parts of the First-Time Homebuyer Tax Credit are
- Who qualifies for the tax credits, and
- How does the tax credit work?
Who Qualifies for The First-Time Homebuyer Tax Credit?
The bill is designed to help middle-class first-time home buyers, but there are qualifications. Here are some of the minimum eligibility requirements:
- You must be a first-time home buyer and not have owned or purchased a home in the past three years.
- Your income must not exceed certain limits. As proposed, your modified adjusted gross income can’t exceed 160% of the median income in the area where the house is located.
- The purchase price must not exceed certain limits.
- You must be purchasing the house as a primary residence. Rental properties and second homes are not allowed.
- You must be at least 18 or married to someone at least 18.
- You cannot be purchasing the home from a relative.
But even if you or your spouse owned a home in the past, some exceptions may allow you to qualify as a first-time buyer:
- If you never owned a principal residence, even if your spouse was a homeowner
- If you are now a single parent who owned a home with your ex-spouse
- If you are a displaced homemaker who only owned property with your spouse
How Does the Tax Credit Work?
The tax credit is equal to 10% of a home’s purchase price but cannot be more than $15,000. For example, if your home’s purchase price is $200,000, you will only receive the maximum $15,000 tax credit and not $20,000 (which is 10% of the purchase price.
The tax credit will likely be increased yearly for inflation with a yearly 2% increase.
The credit is a refundable tax credit. So the tax credit you receive because of your first-time purchase offsets the federal taxes you owe. Unlike a deduction, which reduces your taxable income, a tax credit offsets the taxes you owe on a dollar-for-dollar basis.
For example, if you owed $4,500 in taxes and received a $10,000 credit from a home purchase, you would get a refund of $5,500 when you filed your taxes. The credit does not apply to state taxes.
The credit is applied when you qualify and purchase the home. You do not need to wait until the end of the year to receive it.
Married couples who file separately can only claim half of the available credit each. Unmarried couples who purchase a home together can also split the credit.
What Are the Chances of the First Time Home Buyer Tax Credit Act Passing?
Although most tax and finance professionals believe the First-Time Homebuyer Act will pass, it still has to get through the House and the Senate before the President can sign it into law. You can view the progress of the bill on the Congressional legislative website.
What Is the 2008 First-Time Homebuyer Tax Credit?
In 2008, the Obama administration enacted a first-time homebuyer tax credit. But this tax credit had to be repaid. The tax credit was available for about two and one-half years from April 2008 through September 2010. The IRS defined first-time home buyers as taxpayers who had not owned another home within three years of the new home purchase.
When the program began in 2008, you were allowed a tax credit of 10% of the home’s purchase price, up to maximum credit of $7,500. The maximum amount was raised to $8,000 in 2009.
In general, the tax credit had to be repaid according to the IRS repayment rules. For example, if you purchased a house and took the tax credit in 2008, you had to repay the credit in payments over 15 years starting in 2010.
However, if you sold your home within 36 months of the purchase date or if the home ceased to be your primary residence, you were subject to an acceleration of the repayment according to IRS rules.
The repayment requirement was generally waived if you took the tax credit after 2008.
Available Help for First-Time Homebuyers
First-time homebuyers can get help from a variety of sources right now. State and federal grants, special loan programs, and down payment assistance programs are available to borrowers buying their first home.
State Grants, Programs, and Down Payment Assitance
Most states offer a variety of first-time homebuyer programs. These include down payment assistance loans you typically won’t need to pay back until you sell your home. Some loans are entirely forgivable over a period of time.
Florida has programs that pay you up to $10,000 on government loans or $7,500 on conventional loans. And you can get down payment assistance as a 0% deferred loan. You must meet specific requirements, like a minimum credit score and a maximum debt-to-income ratio.
Federal Programs for First-Time Home Buyers
Many federal agencies and departments have programs and other help for first-time home buyers. This includes the Department of Housing and Urban Development (HUD), the US Department of Agriculture (USDA), FHA, and more.
The Department of Housing and Urban Development (HUD) and other federal agencies offer a variety of programs that may be able to help you purchase a home if you qualify for assistance.
For example, FHA has First-Time Homebuyer Specialists to help you with same-day pre-approvals, low down payments, and even savings on appliances and moving expenses. FHA also partners with programs and agencies in each state to help you with:
- Lower credit scores
- Little (or no) down-payment programs
- Allowing gifts to be used for the down payment
- No income limits
What Can You Deduct on Your Tax Return After Buying a Home?
Mortgage Interest Deduction
Most home buyers finance their homes with a mortgage loan. When you make your monthly payments, you are paying off some of the principal and also paying interest to the bank. You will want to keep receipts and records because the IRS allows you to deduct mortgage interest from your taxable income. While this may not seem like much, your early payments are mostly interest, and your savings can be substantial.
State and Local Property Tax Deduction
One of the main expenses in owning a house is the property tax you pay to the state, county, or local municipalities. These property taxes are generally deductible against your federal income taxes.
Mortgage Insurance Deduction
Depending upon your loan and mortgage terms, you might be paying PMI (Private Mortgage Insurance). This is common on loans where the homebuyer puts down less than 20% of the purchase price. PMI is a temporary fee that typically drops off when your loan-to-value ratio reaches 78% or you reach the halfway point in your loan. But while you are paying it, you can deduct that amount from your federal income taxes.
Here are the answers to some common questions about the 2021 First Time Home Buyer Credit.
There is no first-time homebuyer tax credit currently available. The earlier tax credit is no longer available, and the proposed First-Time Homebuyer Tax Credit does not take effect until the law passes.
Until the passage of the First-Time Home Buyer Tax Act, there is no first-time homebuyer tax credit for 2022.
The First-Time Home Buyer Act is still before Congress, but when passed, it will amend the IRS tax code to allow certain first-time home buyers to qualify for the credit. The qualifying conditions are spelled out in the bill and above in this article.
In general, the IRS considers you a first-time homebuyer if you, or you and your spouse, have not owned any other principal residence for three years prior to the date of purchase of the new principal residence.
If you itemize your taxes, you can deduct your closing costs in the year you closed on your home.