Is the First-Time Homebuyer Tax Credit Making a Comeback?
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Garrett Callahan Contributing AuthorCloseGarrett Callahan Contributing Author
Garrett Callahan is a freelance writer who writes on the ins-and-outs of buying the perfect home. For over six years, he has written extensively on travel, history, and culture, and he spent the past two years researching the home-buying process as a first-time homeowner. Based in Massachusetts, he is an admirer of historic homes and loves an old house with a good story.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
As you’re beginning your home search, you’ve probably made a mental list of all the perks that come along with homeownership: stability, equity growth, and, of course, no more landlords. But what about the tax benefits?
Well, we have some good and bad news. The bad: Due to recent changes in tax policies, owning a home doesn’t give you as much of a tax break as it once did. The good: That might be about to change. In April 2021, two representatives in Congress introduced a first-time homebuyer tax credit bill that could help buyers save a significant chunk of change on their purchases. In fact, it’s very similar to a now-expired first-time homebuyer credit that gave American taxpayers billions of dollars in benefits between 2008 and 2010. The Biden Administration was vocal on the campaign trail about getting a bill like this passed, and it looks like Congress might be about to act.
So how might this program work, and what does it mean for your purchase? With the help of a veteran tax expert and an experienced real estate agent, we’ve compiled a comprehensive look into the proposed first-time homebuyer tax credit. Follow along for all the details you’ll need to know on this potentially game-changing legislation.
How does a homebuyer tax credit work?
Let’s begin with the basics. A tax credit is a straight, dollar-for-dollar reduction in the taxes you owe, meaning it directly reduces your tax bill. In addition, tax credits will often be refundable, which means once you hit zero dollars in taxes owed, the credit will just add to your refund. This is different from a tax deduction, which lowers your taxable income (i.e., the income subjected to taxes).
When it comes to a homebuyer tax credit, there may be limits on the amount of credit you receive depending on your income and home value, says Eugene Steurle, an expert at the Tax Policy Center and institute fellow at the Urban Institute. In addition, there may be different rules on paying the money back based on how long you stay in the property. That’s because the overall goal of a homebuyer tax credit is to incentivize homeownership and assist those who can least afford it.
Compared to other current tax benefits for homeownership, a first-time buyer credit could have significantly more impact if it’s designed correctly, says Steurle. For example, the mortgage interest deduction, which is viewed as a popular tax incentive to buying a home, primarily assists with mortgage debt, not the actual cost of purchasing a property.
“A first-time homebuyer’s credit is different in the sense that its objective is not necessarily to subsidize debt or home mortgage debt,” says Steurle, a former deputy assistant secretary of the U.S. Department of the Treasury for Tax Analysis. “It’s to actually help people buy a home, particularly those who haven’t been able to buy one.”
Let’s take a closer look.
New legislation: the First Time Homebuyer Act
In late April 2021, U.S. Representatives Earl Blumenauer (D-OR) and Jimmy Panetta (D-CA) introduced the First Time Homebuyer Act to the House of Representatives. It proposed a one-time tax credit for first-time buyers up to 10% of the purchase price, with a limit of $15,000. The bill will begin its journey in the House Ways and Means Committee before working its way through a tiring legislative process.
Note: This bill is different from the Downpayment Toward Equity Act of 2021 proposed around the same time. That legislation would provide a grant to help with downpayment costs for qualified buyers. It’s separate from the tax credit, and hadn’t been introduced to Congress as of May 2021.
What does this mean for homebuyers?
As we mentioned, the First-Time Homebuyer Act would provide a refundable tax credit up to 10% of the purchase price or $15,000, whichever you hit first. That means if you paid $300,000 for your house and meet the eligibility requirements, you would receive a $15,000 credit subtracted directly from your tax bill. So if you owed $5,000 in taxes, you would receive a $10,000 refund due to the credit. Or if the IRS already owed you a $1,000 refund, you would receive a $16,000 refund after the credit.
According to the representatives who introduced it, the goal of the bill is to “incentivize housing stability and generational wealth-building opportunities for low- and middle-income Americans, particularly amongst historically marginalized communities.” In short, it’s designed to help those unable to afford a home or families locked out of homeownership in the past.
It comes at a good time too. The number of first-time homebuyers in 2020 was slightly down from 2019, and median home prices rose a record-breaking 19% in April 2021 compared to the same time a year before. That means the median sale price of a home in the U.S. is now over $340,000, a new high. Add on moving costs, closing costs, property taxes, and all other fees, and the barrier to homeownership only grows higher.
That’s especially difficult for marginalized communities that have struggled to build generational wealth. For example, according to the U.S. Census Bureau, Black Americans are nearly 30% less likely to own a home compared to white Americans, while Hispanic communities are more than 20% less likely. Steurle says a credit that is properly designed to make homebuying more affordable should help those most shut out of homeownership.
“The goal of a first-time homebuyer credit is, I think, to actually encourage homeownership and, not just homeownership, but a more equal distribution of wealth,” says Steurle.
What are the requirements?
Here is where the details of the bill might cause some confusion. For one, its name is a little misleading. To qualify for the credit, you must not have owned or purchased a home in the last three years. So it doesn’t have to be your very first time buying a house for you to take advantage of the credit. Here are more requirements:
- Your income must be 160% of your area’s median income or less. So if the median income in your area is $100,000, you must make $160,000 or less to receive the credit.
- Your home’s purchase price can’t be over 110% of the median sale price in your area. So, let’s say the median purchase price in your location is $350,000. The price of your home must be under $385,000. Again, this is to make sure the credit is only going to those who need the most help purchasing a home.
- You must use your home as your primary residence for at least four years. Otherwise, you will be subjected to a tax penalty to pay back part of the credit you received.
- Once you receive the credit, it’s a one-time thing. You can’t receive the credit each year you’re in the house.
- Only homes purchased after Dec. 31, 2020, are eligible for the credit.
It’s important to note that, as of May 2021, the bill is only in committee, so there is a good chance the exact details and requirements in the bill will change if it’s passed into law. It still has to be debated in the House, introduced and debated in the Senate, and then passed to the president. If you’re interested in the full language of the bill as it was introduced, check it out here!
The last first-time homebuyer tax credit
If you thought this all sounded slightly familiar, that’s because it is. Congress actually passed a similar first-time homebuyer tax credit in 2008 to incentivize home buying and bail out the U.S. economy during the Great Recession as a part of the Housing and Economic Recovery Act.
While it was similar in concept, the details were slightly different. When it was first available in April 2008, first-time homebuyers received a tax credit up to $7,500 that they had to repay in installments over 15 years. However, the following year the Obama Administration increased the credit to $8,000 and took away the repayment requirement if the homeowner stayed in the property for at least three years. In 2010, some longtime homeowners who were still in their first home became eligible for a credit up to $6,500. Income requirements also changed as well over time.
Unfortunately, the credit expired in 2010. However, you can still claim the benefit if you bought your house on or before Sept. 30, 2010, and meet all the requirements.
According to Steurle, feelings are mixed on whether the credit actually benefited the U.S. economy and the housing market at the time. However, it’s clear the credit was popular among homebuyers. In 2009 alone, nearly 1.5 million Americans took advantage of the credit for a total benefit of almost $9.9 billion. New home sales also increased somewhere between 10% and 20% from mid-2009 to early 2010, according to the National Association of Home Builders. In 2010, over 2 million Americans claimed the tax credit for a benefit of over $15 billion.
For Washington state real estate agent Sam Mansour, the tax credit was extremely valuable for first-time homebuyers in his area. In 2010, over 50,000 people claimed the credit in his state for a benefit of nearly $400 million.
The housing market is much different today than it was following the 2008 financial crisis. Demand is far greater, and home sales are skyrocketing. In fact, U.S. home sales in 2020 reached its highest level since 2006. But, while the market may not need a lift, another first-time homebuyer tax credit would still be beneficial, Mansour says.
“It’s almost impossible for first-time buyers to compete in this market,” says Mansour, who has 18 years of experience and has worked with 68% more single-family homes than other agents in his area.
“I feel like a first-time buyer needs any penny they can get to compete, and I think this [tax credit bill] is a good tool. [It is] a tool built to help them compete.”
Are there other programs for first-time homebuyers?
If the First Time Homebuyer Act doesn’t make it through Congress, don’t fret. There are still other programs out there in the form of loans, grant money, and other tax benefits aimed to help first-time buyers get into the market. Unfortunately, they just might be a little harder to navigate. Mansour recommends the best starting point is with a local, knowledgeable mortgage lender who will be able to walk you through the options available specifically to you.
Several government-backed loans, such as FHA loans, offer low down payments and less stringent credit requirements than conventional loans. Freddie Mac and Fannie Mae, two government-sponsored mortgage companies, both have programs aimed at helping low-income first-time buyers get into a home. On top of that, many states have their own unique programs that offer further assistance and incentives to buying.
For example, Massachusetts has a first-time buyer program that provides down payment assistance up to $15,000 for qualified buyers as well as mortgage protection in case you lose your job. Other states, like Texas, offer a tax credit for interest paid on your mortgage loan. Just make sure to keep an eye on the income and property value restrictions as well as any repayment requirements.
Pro Tip: Take advantage of this nifty, interactive tool that shows homebuyer programs in each state.
The most important thing to remember is that you will have help in finding these opportunities and realizing your dream of owning a home. Your top buyer’s agent should be able to introduce you to local programs and recommend a qualified lender to give you more details. Then, hopefully in no time at all, you can simply sit back, relax, and take in all the well-deserved benefits of homeownership.
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