There are lots of perks to buying a home for the first time, from having the freedom to decorate exactly how you want to building equity in your home over time. When you first buy a house, you may also wonder whether you could potentially take advantage of a first-time home buyer tax credit.
However, at the time of this writing, the status of this tax credit is in flux. While it isn’t currently available, it’s helpful to know how tax credits can work for you and how you can qualify for a first-time home buyer tax credit if the “Decent, Affordable, Safe Housing for All” or DASH Act is passed into law. Let’s go over some of the ins and outs of this tax credit and what it could offer if you’re buying a home for the first time.
What Is A Tax Credit?
A tax credit is a reduction of your federal income tax on a dollar-by-dollar basis. For example, let’s say you have a tax bill of $500. If you have a $500 tax credit through a tax credit program, your tax liability would then end up as $0.
Types Of Tax Credits
There are three types of tax credits through tax credit programs and federal tax credits:
Nonrefundable Tax Credits
These are directly deducted from your tax liability until it brings the amount you owe to $0. However, you lose any refund you might have gotten since this tax credit will never generate a refund.
In other words, let’s say you have a $500 tax bill and claim a $1,000 nonrefundable tax credit. You can only get $500 – not the full credit – since that’s what you owe.
Refundable Tax Credits
These tax credits are paid out in full and you’re entitled to the full amount of credit. If your credit reduces your tax liability below $0, you’ll get a refund.
Previously, the first-time home buyer tax credit was a refundable tax credit, which means you could qualify for a tax refund. That may change in the future as the bill is revised.
Partially Refundable Tax Credits
Some tax credits only give you a partial refund. In other words, if you reduce your tax liability to $0 before using the entire portion of a deduction, you can take the remainder as a refundable credit up to a certain amount or percentage.
Tax Credits Vs. Tax Deductions
Certain tax breaks are not tax credits – sometimes tax benefits come in the form of tax deductions, a term easily confused with tax credit. Unlike a tax credit, a tax deduction means that you subtract from your taxable income to lower the tax amount you owe. For example, you can deduct a portion or all of your property taxes.
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What Is The Status Of The First-Time Home Buyer Tax Credit In 2023?
Designed to help improve homeownership and designed to make the purchase price of a home more affordable, the first-time home buyer tax credit was introduced as a part of the DASH Act. Also known as the “first-time home buyer act,” it would grant eligible home buyers up to $15,000 in refundable federal tax credits. The bill was introduced in 2021 and reintroduced in May of 2023. At this time, it hasn’t been voted on and isn’t currently available.
How Can You Qualify For The First-Time Home Buyer Federal Tax Credit?
In the previous bill, you must be a first-time home buyer to be eligible for this tax credit. That means you can’t have co-signed a mortgage or bought a house in the last 3 years, including either a primary residence or second home. You also can’t have used the first-time home buyer tax credit before. You must also purchase a primary residence – one that you will live in during most of the year.
Eligibility for first-time buyers also includes the following requirements. You:
- Must not exceed gross income limitations for the area – the tax credit is meant for low- and middle-income families.
- Must be at least age 18 or have a spouse who is at least 18
- Must purchase a home from a non-relative.
Ownership Requirements
It’s worth mentioning that the previous Act specifies that those who use the home buyer tax credit but change primary residences or sell within a 4-year time span will have to contend with a tax liability based on the number of years that they stay in the home.
In other words, if you sell or move in the first year of owning your home, you’ll repay the full $15,000 in the form of taxes. Moving or selling within 2 years requires you to repay 75% in taxes – $11,250. Moving or selling within 3 years requires you to repay taxes at 50%, or $7,500. Moving or selling within 4 years requires you to repay taxes at 25%, or $3,750 of the original $15,000.
Ownership Exceptions
However, there are exceptions (particularly in the case of death, divorce and certain military situations). Furthermore, if you choose to sell your home within 4 years to a non-relative or if homeowners experience real estate gains of less than their tax liability, they need only pay those real estate gains.
In other words, let’s say you receive a $15,000 credit when you purchase your home. You decide to sell it within the first 2 years of purchasing your home. You make $3,000 on the sale, which means that you must pay $3,000 in taxes.
How To Apply For The First-Time Home Buyer Tax Credit
Since it’s not currently available, no specific application requirements currently exist for getting a first-time home buyer tax credit. If passed into law, more information may become available. Keep in mind that certain items could be subject to change prior to a vote on the bill. You’ll likely have an additional IRS form when you file your taxes. Check with your tax preparer for more details about how the potential application process will work.
Naturally, you’ll need to be considered as a first-time home buyer in order to apply, meaning that you’ll need to buy a home. This process typically includes having a good credit score so you can get approved for a mortgage and start your search for a home. After you find one you wish to purchase, you can make sure you have enough funds saved to cover your down payment and closing costs and make an offer.
Other Assistance Available For First-Time Buyers
Since the first-time home buyer federal tax credit isn’t available, there are other first-time home buyer programs to help you fund the purchase of a home.
First-Time Home Buyer Assistance Programs
First-time home buyer assistance programs offer grants and loans to help pay your down payment and closing costs.
First-time home buyer grants are free funds that you don’t have to pay back to a lender. Meanwhile, first-time home buyer loans require repayment. Some loans are forgivable, meaning you might not have to pay them back, but you typically need to meet certain requirements to qualify for loan forgiveness.
Government Programs
You may also qualify for a lower down payment with a government-backed mortgage like a Federal Housing Administration (FHA) loan or Department of Veteran Affairs (VA) loan.
Tax Deductions
Even if you can’t get a first-time home buyers tax credit, you can still qualify for certain types of deductions. For instance, you may be able to lower your taxes with the mortgage interest deduction or the property tax deduction. Talk to a tax professional to learn more about using these options.
First-Time Home Buyer Tax Credit FAQs
Do you have more questions about getting a home buyer tax credit? We have answers.
Has a first-time home buyer tax credit been passed into law before?
Yes. The Housing and Economic Recovery Act (HERA) came about during the financial crisis of 2008 to help first-time home buyers make it more affordable to purchase a home in the United States. The tax credit was worth up to $7,500 in the first year, then it increased up to $8,000 in 2009. Homeowners were able to get a tax credit in the year they first bought their home. However, this credit ended in 2010.
Are there other programs for first-time home buyers that don’t involve a tax credit?
Yes. The HELPER Act, introduced in 2023 is designed to make it easier for K – 12 teachers and first responders to buy a home. It does this by offering all of the benefits of an FHA loan without needing to pay 3.5% down or pay mortgage insurance premiums (MIP). This act has not been voted on yet, but it does have bipartisan support.
Also, the American Dream Down Payment Assistance program, currently going through Congress, has stipulated that it will help set up tax-free accounts to help people save for a down payment.
The Bottom Line: If Passed, The First-Time Home Buyer Tax Credit Could Reduce Your Tax Bill
If passed into law, first-time home buyer tax credits could grant first-time home buyers up to $15,000 in refundable federal tax credits. As of now, the tax credit is still a bill.
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Melissa Brock
Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.
