First-Time Home Owner Definition and Tax Benefits
Qualifying for Special Provisions From the IRS
If you are defined as a "first-time home buyer," you may qualify for penalty-free IRA distributions, 401(k) hardship withdrawals, and/or special mortgage programs. This can be great news for someone who may be starting over later in life.
Strangely, being a first-time home buyer doesn't mean what you may think. You can fall under this category even if this home purchase isn't your first. This is welcome news, as many people who are 50+ have already owned a home at least once in their life. And the definition can vary depending on what program it applies to.
Being Qualified as a First-Time Home Buyer
For purposes of a penalty-free IRA withdrawal, here's how the IRS defines a first-time home buyer (in IRS publication 590):
"If you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."
In simple language, you can't have owned a home for two years prior to the home you are now purchasing.
If you meet this definition, you can withdraw up to $10,000 from your IRA to purchase a home even if you're not yet age 59½—and you won't have to pay the early IRA withdrawal penalty tax. You will still, however, pay income taxes on the withdrawal.
Mortgage Programs for First-Time Home Owners
For mortgage programs, the definition of a first-time home buyer is usually altered to mean someone who hasn't owned a home in the past three years. Special first-time buyer mortgage programs offer preferred terms to such buyers.
Using these preferred-term loans, you can buy a home with as little as 3 percent down. This can be excellent for some, but since such specialized first-time buyer loans may come with restrictions, work with a mortgage broker to explore all your financing options. If you have good credit, a conventional mortgage, instead of a first-time buyer program, may make more sense.
Tax Credits for First-Time Buyers
During the Great Recession, the government wanted to spur home buying activity, so Congress approved a special tax credit: the first-time homebuyer credit (FTHBC). This tax credit is no longer available, and some people who used it may be required to repay it.
First-time buyer credit for homes purchased in 2008: The people who received the FTHBC credit in 2008 are required to participate in the "recapture period" by repaying the credit over 15 years at 6⅔% per year. So if you took the maximum credit of $7,500, you'd have to pay $500 each year for 15 years. If you sell the home, then all of the remaining credit amount would be due on that tax year's report. Your home stops being your main home in the following circumstances:
- You sell the home
- You transfer the home to a spouse or former spouse in a divorce settlement
- The home is converted to a rental or business property, or a vacation or second home
- You no longer live in the home for a greater number of nights in a year
- The home is destroyed or condemned
- The home is lost in foreclosure
- You die
Credit for homes purchased in 2009 or 2010: For home buyers who took the credit in 2009 or 2010, the rules changed considerably. Basically, the IRS didn't intend for people to flip the homes and keep the credit. The maximum credit amount increased to $8,000 for first-time buyers, and the repayment clause was eliminated based on certain requirements.
Because more than 36 months have passed since this credit was issued, the requirements for repayment aren't relevant now if the home was and still is your primary residence. But if you turn the property into a rental property or business, the IRS dictates that you must repay the full amount and complete Form 5405 as an attachment to your federal tax return for the year it was converted.