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First-Time Home Buyer Tax Credit and How Else You Can Get Deductions

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What You Need To Know

  • The First-Time Homebuyer Act of 2021 promises eligible first-time home buyers a federal tax credit of up to $15,000
  • Presidents Bush and Obama used first-time home buyer tax credits to revitalize the U.S. economy after the housing bubble burst in 2008
  • There are first-time home buyer programs, grants and tax incentives available at the state and local levels

Contents

If you’re in the market (or the mood) to finally own a place you can call your own, you’ll want to know everything there is to know about the First-Time Homebuyer Act of 2021. 

The bill is still navigating its way through the halls of Congress, but this Biden administration tax credit could benefit thousands of aspiring homeowners who are struggling to break into the housing market. 

The tax credit is slated to act as an incentive that will unlock homeownership for millions, helping lower- and middle-income Americans buy their first home.  

But, while we’re waiting for the proposed tax credit to become law, there are other federal and state tax incentives first-time home buyers can take advantage of right now.

If you qualify for a first-time home buyer program, it can help you save lots of money through tax credits, grants and more.  

What’s a First-Time Home Buyer Tax Credit?

A first-time home buyer tax credit is a government program that gives newbie home buyers a break on their income taxes. 

The tax credit is an incentive that can help make homeownership accessible and affordable, particularly for aspiring homeowners from historically marginalized communities. 

Federal first-time home buyer tax credits aren’t a new phenomenon. They’ve been around since the 2000s.  

The First-Time Homebuyer Tax Credit of 2008

In 2006 and 2007, a housing bubble developed in the United States. In 2008, the housing market bubble burst, leading to the Great Recession, which had long-term consequences for the U.S. economy and the banking sector. In the wake of the recession, lenders tightened the criteria to qualify for mortgages. And many potential buyers found it harder to get approved for home loans.  

In 2008, Congress passed the Housing and Economic Recovery Act (HERA). The goal was to revitalize the American economy and encourage people to buy homes.

Qualified buyers who closed on properties between April 8, 2008, and January 1, 2009, were able to get the temporary tax credit, which worked like an interest-free loan.[1]

Home buyers could get a maximum credit of $7,500 and had 15 years to repay the credit on their federal income tax returns. (If you got $7,500 in 2009, you’d pay back $500 on your tax returns from 2010 – 2025.)[2]

In 2009, HERA was modified under the American Recovery and Reinvestment Act. This time, qualified first-time home buyers got a tax credit of up to $8,000 – but didn’t have to pay it back.[3]

The tax credit program ended in 2010, but the First-Time Homebuyer Act of 2021 builds from the federal government’s legislative legacy of supporting first-time home buyers. 

What’s the 2021 First-Time Homebuyer Tax Credit?

U.S. lawmakers introduced the First-Time Homebuyer Act of 2021 in April. The bill supports a key campaign promise of President Biden to address the housing affordability crisis.[4] 

The bill proposes a tax credit worth up to 10% of the home’s purchase price or $15,000 max. The program would apply to all home purchases beginning January 1, 2021, and may even work retroactively for homes that were bought in 2020.[5]

If you qualify, the tax credit will lower what you owe in federal taxes. If you’re married but file taxes separately from your partner, each of you can claim half the total credit amount you qualify for. 

Who’s eligible for the 2021 First-Time Homebuyer Tax Credit?

Here are the requirements eligible home buyers must meet[5]:

  • You must be 18 or older, or married to someone who is, on the date of purchase.
  • You must be a first-time home buyer, or you haven’t owned a home or co-signed a mortgage in the last 3 years. (This includes primary homes, secondary homes and vacation properties.)
  • You can only use the tax credit once. 
  • You can’t earn more than 60% of the median income in your area. Exceptions are made for households with multiple income earners – this applies to married and unmarried joint filers.
  • You can’t buy a home from a relative. You can’t buy a home from your spouse, parent, grandparent, child, aunt, cousin, uncle … you get the picture. 

Under what circumstances will you have to pay back the tax credit?

Breaking the rules of the tax credit program can mean having to repay all or part of the tax credit. The biggest taboo is moving or selling your home too soon. If you plan on flipping a house, this tax credit isn’t for you.

The program is designed for low- and middle-income home buyers to help them close the home affordability gap. It’s not geared toward investors. If you sell or move within 4 years of buying the home, you’ll have to pay back a percentage of the tax credit[5]:

  • Within 1 year: Repay 100%
  • Within 2 years: Repay 75%
  • Within 3 years: Repay 50%
  • Within 4 years: Repay 25% 

What is the Downpayment Toward Equity Act?

The 2021 Downpayment Toward Equity Act isn’t the same thing as the First-Time Homebuyer Tax Credit Act. This proposed bill, which was also introduced in April, would issue $25,000 grants to qualifying first-time home buyers to use for[6]:

  • Down payments
  • Real estate closing costs
  • Mortgage interest rate reductions
  • Other home purchase expenses

While these programs aren’t the same, first-time home buyers could potentially qualify for both! Qualifying for both could add up to a total of $40,000 in cash and tax credits.

How Do You Apply for the 2021 First-Time Home Buyer Tax Credit?

The First-Time Homebuyer Act hasn’t been brought up for a vote yet, but you should check out existing local and state-wide programs that offer first-time home buyer grants and tax credits. 

Many states offer zero-interest loans or grants to help with down payments or other related home purchasing costs. Doing some research into your state’s programs could save you thousands of dollars, so it’s worth starting now.

It’s also good to know what tax benefits are available after you buy a home, like claiming mortgage insurance premiums as a deduction. 

What Other Options Exist?

There is no shortage of assistance for first-time home buyers.

  • The Department of Housing and Urban Development (HUD) offers a variety of grant and loan options
  • The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Fannie Mae and Freddie Mac offer low and 0% down payment loan programs.
  • You may be eligible for a mortgage credit certificate or other down payment assistance programs offered by your state’s Housing Finance Agency. 

When it comes to finding cash, grants or tax credits to buy your first home, seek, and if ye qualify, ye shall find. Do your research and take all the paths that can guide you to the front steps of your first home.

  1. Congress.gov. “HOUSING AND ECONOMIC RECOVERY ACT OF 2008.” Retrieved December 2021 from https://www.congress.gov/110/plaws/publ289/PLAW-110publ289.pdf

  2. Internal Revenue Service. “Topic No. 611 Repayment of the First-Time Homebuyer Credit.” Retrieved December 2021 from https://www.irs.gov/taxtopics/tc611

  3. Congress.gov. “Text – H.R.1 – 111th Congress (2009-2010): American Recovery and Reinvestment Act of 2009.” Retrieved December 2021 from https://www.congress.gov/bill/111th-congress/house-bill/1/text

  4. JoeBiden.com. “The Biden Plan for Investing in Our Communities through Housing.” Retrieved December 2021 from https://joebiden.com/housing/

  5. Congress.gov. “H.R.2863 – First-Time Homebuyer Act of 2021.” Retrieved December 2021 from https://www.congress.gov/bill/117th-congress/house-bill/2863/text?r=59&s=1

  6. Congress.gov. “H.R.4495 – Downpayment Toward Equity Act of 2021.” Retrieved December 2021 from https://www.congress.gov/bill/117th-congress/house-bill/4495/text

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In Case You Missed It

Take-aways

  1. Buyers who use the 2021 first-time home buyer tax credit will have to repay all or part of the credit if they move within the first 4 years of buying a house
  2. The Housing and Economic Recovery tax credit required home buyers to repay the tax credit over 15 years
  3. If passed, the Downpayment Toward Equity Act could give home buyers up to $25,000 to use toward down payment expenses

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