Do First Time Home Buyers Get a Tax Credit?

While a specific federal tax credit for first-time homebuyers does not currently exist, the tax code still contains multiple provisions that can lower the financial burden of owning a home. The most famous program ended over a decade ago. These benefits range from deductions that reduce your taxable income to a lesser-known tax credit. A variety of state and other financial assistance programs are also available to help individuals achieve homeownership.

The Expired Federal First-Time Homebuyer Credit

The program that often causes confusion is the expired First-Time Homebuyer Credit. This was a temporary federal program for homes purchased between 2008 and 2010, providing a tax credit of up to $8,000. This program cannot be claimed for any home purchases made today.

For homes bought in 2008, the credit acted as an interest-free loan requiring repayment over 15 years. Because of this, some individuals may still be making these repayments on their annual tax returns.

Current Federal Tax Benefits for Homeowners

New homeowners can benefit from several federal tax deductions. A deduction lowers your taxable income, while a credit reduces your final tax bill dollar-for-dollar. To claim these home-related deductions, you must itemize on your tax return, meaning your total itemized deductions must exceed the standard deduction for your filing status.

The mortgage interest deduction allows homeowners to deduct the interest paid on a loan used to buy, build, or substantially improve a primary or second home. This deduction is limited to the interest paid on up to $750,000 of mortgage debt ($375,000 if married filing separately). This limit applies to mortgages taken out after December 15, 2017.

Homeowners can also deduct state and local taxes (SALT), which consist of property taxes for most homeowners. This deduction is capped at a total of $10,000 per household per year ($5,000 for married individuals filing separately). This single cap includes property taxes plus either state and local income taxes or sales taxes, which can limit the benefit for those in high-tax areas.

Another deduction relates to mortgage points, which are fees paid to a lender to lower the interest rate on a mortgage. If the points are paid on a loan to purchase or build your main home, they may be fully deductible in the year you paid them. For points paid on a refinance, the deduction must be spread out over the life of the loan. The IRS has specific criteria that must be met to deduct points in the year of purchase.

Mortgage Credit Certificates

A more direct tax benefit is the Mortgage Credit Certificate (MCC). An MCC is a federal tax credit issued by state and local housing finance agencies to help lower-income individuals afford homeownership. It is not a loan but a certificate that allows a qualifying homeowner to convert a portion of their annual mortgage interest into a tax credit.

The credit amount is calculated as a percentage of the mortgage interest paid each year, with the specific percentage set by the issuing agency. The maximum credit is capped at $2,000 per year. The remaining mortgage interest that was not converted into a credit can still be claimed as an itemized deduction, providing a dual benefit.

To receive an MCC, a buyer must meet several requirements. These typically include being a first-time homebuyer, having an income below a certain limit, and purchasing a home that does not exceed a specified price. You must apply for and be approved for the MCC before you close on the home; it cannot be obtained retroactively. The program is administered at the state or local level, and availability can be limited.

State Programs and Other Financial Assistance

Many state housing finance agencies offer their own first-time homebuyer programs. These programs vary widely but can include down payment assistance, closing cost help, favorable interest rates on loans, and in some cases, state-specific tax credits. Prospective buyers should research the housing finance agency in the state where they plan to purchase.

A common form of this assistance is a Down Payment Assistance (DPA) program. DPAs provide funds to cover the upfront costs of buying a home and are often structured as grants that do not need to be repaid or as low-interest, forgivable loans. For example, a DPA might be a five-year forgivable loan, where a portion of the loan is forgiven each year the owner lives in the home. This is direct financial aid rather than a tax benefit.

Another tool is the ability for first-time homebuyers to make a penalty-free withdrawal from a traditional IRA. The IRS allows an individual to withdraw up to $10,000 from their traditional IRA to buy, build, or rebuild a first home without incurring the usual 10% early withdrawal penalty. While the 10% penalty is waived, the withdrawal is still subject to regular income tax.