The government offers federal and state tax breaks to homebuyers in order to keep the housing market strong and encourage people to buy homes. One such incentive was the Obama-era first-time homebuyer tax credit, which offered qualified homebuyers a credit of up to $8,000. Unfortunately, that tax credit no longer exists, but there are still tax breaks available for those buying a home in 2023.
First-time and seasoned homebuyers alike can take advantage of a number of credits and deductions as long as they know where to look and how to file their taxes. Plus, there’s some hope that a stronger first-time home buying tax credit will return if the First-Time Homebuyer Act, introduced to Congress in 2021, passes in 2023.
Introduced in April 2021 by several Democratic members of Congress, the First-Time Homebuyer Act of 2021 aims to bring back the Obama-era tax credit for first-time home buyers from 2008.
Under the proposed bill, eligible homebuyers could receive a tax credit of up to 10% of their home’s purchase price, up to $15,000.
The bill failed to pass Congress and has yet to be signed into law, and although the details can change before it is, current eligibility requirements are:
The new tax credit stands to work similarly to the 2008 credit. Eligible homebuyers may receive a refundable tax credit equal to 10% of their home’s purchase price — up to $15,000. Once received, the tax credit would automatically apply to your federal tax bill without a formal application. However, you might have to file a separate IRS form with your federal tax return.
The proposed bill says that if you own your house for at least four years, you don’t have to repay the tax credit. If you sell your home or move within the first four years of ownership, you must pay back a portion of the tax credit, based on the length of ownership. (Keep this in mind when considering how soon to sell your home after buying it.) There are exceptions for death, divorce, military transfers, and transactions in which you profit less than your tax liability.
Pending the passage of the First-Time Home Buyers Act, there aren’t many great tax credits for just first-time home buyers. State programs exist, but they’re rarely as compelling as federal offers. In the meantime, however, homeowners can leverage a number of credits and deductions to help save a little money come tax time.
In contrast to tax deductions, tax credits are deducted directly from the taxes you owe. While there are relatively few tax credits specific to first-time home buyers, all homeowners have access to a litany of tax credits and tools to save money. Here are some of the most common:
Lower-income homeowners who were issued a qualified mortgage credit certificate (MCC) from a state or local government to subsidize their home purchase may claim a mortgage interest credit in addition to the interest deduction. The mortgage interest credit ranges from 10% to 50% of mortgage interest paid during the year and capped at $2,000 if the credit rate is higher than 20%.
This credit has many rules and restrictions, the biggest being that you need a qualified MCC. Also, you can’t claim the credit more than once, so if you claim the mortgage interest credit, you must reduce your mortgage interest deduction by the credit amount.
Go green, get rewarded. If you install certain energy-efficient equipment in your home, you can save 30% on qualifying energy efficient improvements like installing energy efficient insulation, exterior doors and windows, heat pumps or biomass stoves and broilers, electric or natural gas water heaters, and home energy audits. Eligible homeowners can generally claim up to $1,200 annually.
→ Learn more about residential energy credits
This final credit is for sellers, not buyers, but it’s worth knowing. When you sell your home, you may be entitled to write off up to $500,000 ($250,000 for single filers) of profit. The Home Sale Tax Exclusion protects you from capital gains tax if:
The IRS doesn’t give many gifts, but this is a big one. So if you’re buying a home in a hot market, bear in mind you have to stay there for a while before trying to flip it. Otherwise, you’ll get hit with a hefty capital gains tax bill.
Tax deductions lower your taxable income and the rate at which you are taxed, resulting in a larger refund. Here are some of the most common tax deductions for homeowners:
While Biden’s first-time homebuyer credit is the biggest first-time homebuyer tax credit, it isn’t law yet. So, if you’re looking to buy your first home in the near future, you’ll need to look elsewhere for tax breaks.
Most states offer first-time homebuyer programs that include tax credits, and may even provide zero-interest loans and grant money to put toward a down payment.
In Texas, for example, the Texas State Affordable Housing Corporation offers mortgage tax certificates that let you deduct a large portion of your mortgage interest on your annual federal tax return.
Most state programs have a maximum limit on income and property value since they cater to lower-income buyers, but they’re worth checking out to see if you qualify.
If you have a Roth IRA or traditional IRA, first-time homebuyers are also allowed to take up to $10,000 out of their accounts to buy a home. Each account has different rules and tax consequences, so if you need a little extra help with your down payment, discuss this tool with your real estate agent before pursuing it.
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