First-Time Home Buyer Tax Credits

Published September 13, 2018
First-time home buyers get keys

While most first-time home buyers are pleased to find attractive tax deductions, the generous tax credit resulting from the Housing and Economic Recovery Act of 2008 is no longer an option for new first-time home buyers. Presently, credits for first-time buyers are typically administered and issued by local agencies and vary from state to state.

Housing and Economic Recovery Act of 2008

The Housing and Recovery Act of 2008 was in response to the Great Recession, attempting to help struggling home owners keep their homes while also promoting new home ownership. The tax credit resulting from the Act was specific to first-time home buyers (meaning they had not owned a home in the previous three years) and varied from 2008 to 2010.

  • In 2008, the tax credit was an interest-free loan that had to be repaid except in special, specific circumstances.
  • In 2009, the tax credit did not require repayment in most circumstances.
  • In late 2009 and into 2010, a home buyer tax credit was available to all qualified home owners, not just first-time buyers.

This tax credit is no longer available for home purchases, but eligible tax payers who never claimed the credit may still be able to do so by amending their tax returns from that year with an IRS Form 1040X.

Mortgage Interest Credit

The Mortgage Interest Credit is available to first-time home buyers who fall within the category of "low income" as prescribed by the state issuing the credit. Credits or grants may also be available to teachers or other public servants in some areas. Since this program varies from state to state, it may not be available everywhere. The home buyers receive a Mortgage Credit Certificate that must be filed with the Internal Revenue Service along with Form 8396 in order to claim the credit. The amount of the credit depends on the purchase price of the home, the mortgage interest rate, and the rate set by the issuing agency.

Local Mortgage Credits

Though these may not come in the form of actual tax credits, many state and local governments provide financial incentives for first-time home buyers, particularly since the tax credits from the Housing and Economic Recovery Act expired. NerdWallet suggests contacting your local Housing Finance Agency to inquire about available programs for first-time home buyers.

Other Home Buyer Options

Tax credits aren't the only option for first-time home buyers for getting a little help with obtaining their home. In addition to the generous tax deductions available to most home owners, the U.S. Department of Housing and Urban Development (HUD) lists a variety of state-specific programs designed to help aspiring home buyers. These programs are typically in the form of grants or low-cost loans; check with HUD for specifics about eligibility and application requirements.

IRA Withdrawal for Down Payment

You are allowed to withdraw up to $10,000 from your traditional IRA to go toward your down payment. While this option may appear attractive, most financial experts advise against it. The distribution will be considered income and taxed accordingly. Also, taking money out of your retirement savings reduces your ability to fund your own eventual retirement.

Mortgage Points Deduction

Available to all home buyers, funds used to pay for mortgage points at closing are typically tax deductible. That's because points are basically pre-paid mortgage interest, and since mortgage interest paid is tax deductible, points are as well.

Newest Available Credits and Deductions

Tax laws relating to home buying evolve with time, so just because some tax credits have expired doesn't mean new ones don't exist. Check with a mortgage or tax professional to discover what is available to you in your location and with your specific circumstances.

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First-Time Home Buyer Tax Credits