First Time Home Buyer Tax Credit: What’s Available?

Many prospective homeowners begin their journey with a search for a first-time home buyer tax credit, often recalling a well-known federal program from the past. The landscape of home buyer assistance has changed significantly. The widely referenced federal tax credit available between 2008 and 2010 has expired and is no longer available for current home purchases. A similar, broad-based federal credit is not active for the current tax year. However, support for first-time buyers now exists in different forms, including other federal tax benefits and a wide array of state and local programs.

The Status of a Federal First-Time Home Buyer Tax Credit

The conversation around a federal tax credit for first-time home buyers often stems from the Housing and Economic Recovery Act of 2008. This act introduced a temporary, refundable tax credit that ended for home purchases after May 1, 2010, meaning it cannot be claimed on current tax returns.

In recent years, new legislation has been proposed in Congress to create a new federal benefit, often referred to as the First-Time Homebuyer Act. This proposed bill would establish a tax credit of up to $15,000, calculated as 10% of the home’s purchase price. Eligibility under the proposal would be limited by income, generally to those earning no more than 160% of the area’s median income, and by the home’s price, which could not exceed 110% of the area’s median home value. This act is currently a proposal and has not been passed into law, so prospective buyers should not factor this proposed credit into their current home-buying budget.

Existing Federal Tax Benefits for Home Buyers

While a broad federal tax credit is not currently active, two specific federal tax provisions can provide financial assistance to qualifying first-time home buyers. These benefits are the Mortgage Credit Certificate (MCC) and the ability to make penalty-free withdrawals from retirement accounts.

A Mortgage Credit Certificate, or MCC, is a federal tax credit that reduces a homeowner’s income tax liability. An MCC provides a credit for a percentage of the mortgage interest paid each year for the life of the loan, as long as the home remains the owner’s primary residence. These certificates are issued by designated state and local housing finance agencies, not the IRS. The credit amount is calculated by multiplying the mortgage interest paid during the year by a specific credit rate, which typically ranges from 10% to 50%. The annual credit is capped at $2,000 if the certificate’s credit rate is above 20%, and the remaining mortgage interest can still be claimed as an itemized deduction. Eligibility is restricted to first-time buyers who meet specific income and purchase price limits established by the issuing agency.

Another existing benefit allows for penalty-free withdrawals from an Individual Retirement Arrangement (IRA) for a first home purchase. The IRS permits an individual to withdraw up to $10,000 from a traditional or Roth IRA to buy, build, or rebuild a first home without incurring the standard 10% early withdrawal penalty. This is a lifetime limit per person, meaning a qualifying couple could withdraw up to $20,000 combined from their respective IRAs. For this exception, the IRS defines a first-time home buyer as someone who has not owned a principal residence for the two-year period ending on the date of acquisition of the new home. While the 10% penalty is waived, if the funds are withdrawn from a traditional IRA, the amount is still subject to regular income tax.

State and Local First-Time Home Buyer Programs

Beyond federal provisions, the most substantial financial aid for first-time home buyers often comes from programs administered at the state and local levels. These initiatives are designed to address specific housing challenges within their communities and offer a diverse range of support.

Assistance from these programs is typically delivered in several forms. Down payment assistance, or DPA, is one of the most common types of aid, providing buyers with funds to cover the initial costs of purchasing a home. This assistance may be structured as a grant, which does not need to be repaid, or as a forgivable loan, which is forgiven over a set number of years as long as the buyer remains in the home. Some states also offer their own tax credits, separate from any federal benefits.

To find these resources, prospective buyers should start by researching their state’s housing finance agency (HFA). Every state has an HFA, and its website is the primary source of information for state-sponsored homeownership programs, including eligibility requirements and lists of participating lenders. Another resource is the U.S. Department of Housing and Urban Development (HUD). The HUD website offers a state-by-state portal that directs users to local home buying programs and approved housing counseling agencies.

Claiming Available Tax Benefits

Once a home buyer has utilized an available federal tax benefit, specific procedural steps must be followed when filing their annual income tax return. The process differs for the Mortgage Credit Certificate and the IRA withdrawal, each requiring a distinct IRS form.

For homeowners with a Mortgage Credit Certificate, the document is IRS Form 8396, Mortgage Interest Credit. This form is used to calculate the precise amount of the tax credit for the year. The lender or the state/local agency that issued the MCC provides the certificate containing the credit rate needed for the calculation. Form 8396 must be completed and attached to the taxpayer’s annual Form 1040. The amount of the credit claimed on this form reduces the amount of mortgage interest that can be taken as an itemized deduction on Schedule A.

For those who made a penalty-free withdrawal from an IRA, the process involves two different forms. The financial institution that holds the IRA will issue Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form reports the total amount of the distribution. To claim the first-time home buyer exception and waive the 10% penalty, the taxpayer must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. On this form, the taxpayer will enter the appropriate exception code to show the funds were used for a qualifying home purchase.