What Is a First-Time Homebuyer Credit?

Tax breaks can help first-time homebuyers save money

Young couple in empty kitchen of new house
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The federal first-time homebuyer tax credit was a tax break offered to eligible individuals and couples who purchased a home between April 8, 2008, and May 1, 2010. This tax credit was introduced as part of an economic recovery initiative launched by the Obama administration following the financial crisis of 2007-2009. 

While this program is no longer available, you may still qualify for a state tax credit to buy a first home, depending on where you live. What’s more, the Biden administration has proposed a new homebuyer tax credit that could make purchasing a home easier. 

What Was the First-Time Homebuyer Credit?

The first-time homebuyer credit was introduced as part of the 2008 Housing and Economic Recovery Act. HERA was a comprehensive piece of legislation designed to spur economic growth in the wake of the financial crisis. The tax credit was meant to encourage consumers to purchase homes, which would, in turn, help to stimulate the economy. 

The homebuyer tax credit was extended to eligible individuals and couples. The credit for homebuyers was worth 10% of the home's purchase price. Its maximum upper limit depended on when you bought the home.

Here are three examples of what the credit was worth in each year it was offered. If you bought a home:

  • In 2008, your credit would have been worth $7,500.
  • From Jan. 1 to Nov. 7, 2009, your maximum credit would have been $8,000.
  • After Nov. 7, 2009, but before May 1, 2010, your maximum credit would have been $6,500.

If you qualified for the 2008 credit, it was treated as an interest-free loan. The IRS required those homebuyers to repay the credit over a 15-year period through an individual federal income tax increase. The credit did not have to be repaid by those who purchased homes in 2009 and 2010, with some exceptions. But the 2009 credit was only available to people who hadn't owned a home in the prior three years. 

Note

The IRS doesn't require repayment of the credit if the homebuyer dies unless it was claimed on a joint tax return. 

Where to Find First-Time Homebuyer Credits

The federal first-time homebuyer credit has gone away. However, if you’re planning to buy a home, you may be able to take advantage of tax breaks or other benefits at the state level. The types of assistance you may benefit from can include:

  • Tax credits for purchasing a home
  • Down-payment grants
  • Closing-cost assistance

For example, Idaho offers its residents a Mortgage Credit Certificate. This allows homebuyers to claim a federal tax credit of up to 35% of mortgage interest paid annually, up to $2,000 per year. First-time homebuyers who meet income limits and other requirements may be able to take advantage of this program to save on mortgage interest costs. Florida and North Carolina offer similar programs. 

In New York City, the HomeFirst Down Payment Assistance Program offers up to $40,000 toward a down payment for eligible homebuyers. You must be a first-time homebuyer to qualify and be within maximum income limits for your household size. But qualifying for a down-payment grant in the state could remove a significant obstacle from buying a home.

New Jersey offers a down-payment assistance program that provides up to $10,000 in interest-free forgivable funding to eligible first-time homebuyers. This money can be used toward a down payment or your closing costs. You have to buy a home in New Jersey and use an approved mortgage lender to qualify. 

Important

Some down-payment and closing-cost assistance programs require you to live in a home for a certain number of years before they’ll agree to work with you. If you haven’t reached that number, you might have to repay any money you receive. 

Other Homebuyer Tax Advantages

Besides getting some tax benefits upfront when you buy a home, once you're officially a homeowner, you can also take advantage of federal tax deductions. Deductions are helpful because they reduce your taxable income for the year. 

The mortgage interest deduction, for example, allows you to deduct mortgage interest paid on eligible loans. You can deduct interest on the first $750,000 in mortgage debt for homes purchased after Dec. 15, 2017. The IRS cuts that amount in half if you're married but file joint tax returns. 

The property tax you pay on a home you own is also tax-deductible under the state and local tax (SALT) deduction rules. The total amount of state and local taxes you can deduct (including property taxes) is capped at $10,000, but proposed legislation may remove that limit.

As mentioned, the Biden administration could succeed in pushing through a new first-time homebuyer tax credit. This credit would be worth up to $15,000 for eligible first-time buyers. Congress would still have to agree on this proposal and make it law, however, before new homebuyers could benefit. 

Tip

You have to itemize your taxes to claim mortgage interest or SALT deductions. Be sure to compare the tax benefits with what you might get from claiming the standard deduction instead. 

The Bottom Line

Buying a home can be stressful, but tax incentives and homebuyer assistance programs can  make the process easier. While no first-time homebuyer tax credit currently exists at the federal level, one may be on the horizon again. In the meantime, it's worth looking into what's available at the state level to help make buying a first home an achievable goal.