Bought your first home this year? You’ll want to know about this tax credit

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A tax credit for first-time homebuyers is making its way through Congress this year. A revamp of the first-time homebuyer tax credit from 2008, the proposed bill includes an increase in borrowing limits, income limits and the credit itself.

As much as $15,000 could be claimed as a refundable tax credit should the bill pass.

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 near future as legislation for a new first-time homebuyer tax credit was introduced in the House of Representatives in April 2021.

The new first-time homebuyer tax credit may be worth up to $15,000 for buyers whose adjusted gross income doesn’t exceed 160% of the median income for the area.

Related: Mortgage interest deduction explained

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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.

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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 was not yet law as of early 2022.

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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.

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Possible Deductions

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.

A 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.

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How Does the Tax Credit Work?

If 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) in a check or a direct deposit 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

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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 can be found below.

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First-Time Homebuyer Act of 2021

  • Available to homeowners who have not owned a home in the last three years
  • Credit against taxes of 10% of the purchase price, up to $15,000, available as a refundable tax credit
  • For buyers whose income doesn’t exceed 160% of the median income for the area
  • Must be a 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 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
  • Has been introduced in the House and has been referred to the Ways and Means Committee. Has not passed as of early 2022
  • Must be at least 18 years of age
  • Must attach the settlement statement to your taxes

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Downpayment Toward Equity Act Grant

  • 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
  • Up to $25,000 available, and possibly more for high-cost areas
  • 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 principal residence
  • 1-4 units will qualify
  • Must come from a socially and economically disadvantaged group
  • After 60 months of occupancy, the grant does not need to be repaid
  •  Has been introduced in the House but has not passed as of early 2022
  • Assistance can be used for the costs to acquire the mortgage as well as home modification costs for those with disabilities
  • Can be combined with other assistance programs, such as the first-time homebuyer tax credit

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Help for First-Time Homebuyers

The definition of first-time homebuyer isn’t always as simple as it seems. What is clear, though, is that first-timers have access to a lot of programs that help with costs.

first-time homebuyers guide can help answer questions.

Are you crunching numbers? Try this mortgage calculator tool. Keep in mind that some private lenders allow a down payment for first-time buyers that may be even lower than FHA loans.

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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.

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