What is the Tax Credit for Buying a House in 2023?
When most people think about homeownership, they think about the numerous benefits that come with it. These benefits can include increased financial stability, a place to call your own, and a valuable asset that can be used as collateral for other investments. However, for many people, the biggest barrier to homeownership is the upfront cost. In recent years, the federal government has introduced tax credits to help first-time homebuyers overcome this barrier.
In fact, 2023 could see the rise of a new type of tax credit for buying a house. Let’s break down the tax credit for buying a house in 2023 and explore what it means for first-time home buyers specifically.
First-Time Homebuyers Tax Credit
To stimulate the housing market and to minimize the differences between white communities and communities of color, President Biden is attempting to pass the First-Time Homebuyer Act of 2021. This new tax credit is designed to help low and middle-income first-time homeowners purchase a property without taking on too much of a financial burden.
The first type of tax credit is known as the "tax credit for first-time homebuyers." This credit is available to anyone who has never owned a home before. The credit can be claimed on your tax return for the year in which you purchase your home. There are a few important things to note about this credit. First, you must occupy the home as your primary residence within 60 days of purchase. Second, the credit must be claimed on your tax return in the year in which you purchase the home. Finally, any unused portion of the credit can be carried forward to subsequent years.
The First-Time Homebuyer Act of 2021 enables federal tax credits worth up to $15,000. It applies to any home purchased after January 1, 2021 with no end date or cap written so far.
Note that the First-Time Homebuyers Tax Credit is still a bill rather than a law. It must still pass both houses of Congress before it applies. As of November 2022, this tax credit is still not applicable to new home buyers.
Tax credits are nothing new for homeownership. Home-equity loans, for instance, were explicitly designed to give homebuyers a leg up when needed. The First-Time Homebuyer Tax Credit is different due to its focus.
Other tax deductions for the federal income tax return continue to exist, of course. Some allow you to deduct property taxes, where others may let you deduct mortgage interest or mortgage insurance premiums. Others may allow you to take a home office deduction if you are self-employed.
How Does the $15,000 Tax Credit Work?
In a nutshell, this refundable tax credit may be applied to your tax return at the end of the year and is equal to 10% of a home’s purchase price. It cannot exceed $15,000 in total. For instance, if your home is worth $200,000, you will still only receive $15,000 in tax credits, not $20,000 (which would be 10% of a $200,000 home price).
However, the tax credit amount will follow a presumed 2% inflation rate. Over the years, this may change the maximum tax credit amount from $15,000 in 2021 up to $16,236 in 2025.
When the tax credit is applied, it goes directly to your tax bill and may not be used for state taxes. Married couples who file separately are only able to claim half of the available credit each.
Who Qualifies for the First-Time Homebuyers Tax Credit?
As the name suggests, the First-Time Home Buyer Tax Credit is only available for certain individuals. These individuals include:
First-time homebuyers. If you have already purchased a home as a primary residence, you will not qualify. However, if you have purchased a home for renting or for other purposes, you may still qualify (though the application process may also be more complex)
Those who have not owned a home in the past 36 months
Those who do not earn more than the income limitations specified
Those who plan to purchase the home as a principal residence. First-time homebuyers who wish to rent the property do not qualify for this tax credit
Furthermore, anyone applying for the First-Time Buyer Tax Credit must be 18 years of age or older or married to an 18-year-old. The property in question may not be purchased from a relative, too. Again, this tax credit is not yet available for 2021 or 2022 home buyers.
How to Claim the Tax Credit
Since the bill is not yet law, it’s not clear how homebuyers will be able to claim the tax credit step-by-step. But it’s likely that it will be similar to the First-Time Homebuyer Credit of 2009, which was a similar program and which required homebuyers to fill out an extra IRS form to attach to their federal tax return.
If the First-Time Homebuyers Tax Credit is passed, consult with an accountant or visit government websites for more information about how to apply the credit to your tax return.
Will Homebuyers Need to Apply for the Tax Credit?
In all likelihood, no. It’s more likely that the IRS will automatically apply the tax credit if you note that you are a first-time homebuyer on your tax return for the applicable year. However, the details will have to be finalized if and when the bill is actually passed.
Limitations on the Tax Credit
Though the First-Time Homebuyers Tax Credit could be a great financial break for millions of Americans, there are some limitations to keep in mind.
The tax credit isn’t intended for real estate investors, house flippers, or anyone else with significant real estate wealth
If buyers use the tax credit, then change their primary residence or sell the property within four years of purchase, they will have a tax liability. This ranges from $15,000 down to $3750 depending on when the home is sold or when the homebuyers move. In these cases, the homebuyers will have to repay the tax credit on the following tax return
There are exceptions to the above rule. If a homebuyer received $15,000 in tax credit when they bought their home, then were forced to sell the home due to a divorce or military transfer, the repayment penalty may not apply.
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Another type of homebuyer tax credit is known as the "mortgage interest deduction." This deduction allows homeowners to deduct the interest they pay on their mortgage from their taxable income. This can result in significant savings, particularly in high-tax jurisdictions. The amount of interest that can be deducted depends on several factors, including the amount of the mortgage and the taxpayer's income bracket. Homeowners can also deduct points paid on their mortgage from their taxable income.
Both of these tax credits are extremely beneficial for first-time homebuyers. The tax credit for first-time homebuyers can help reduce or even eliminate the upfront cost of homeownership. The mortgage interest deduction can save homeowners thousands of dollars each year on their taxes.
Summary
With luck, the First-Time Homebuyers Tax Credit will pass both houses of Congress (the House and Senate) in 2023. If this occurs, millions of Americans will have a much easier time becoming homeowners and building wealth for their families for decades to come. Even better, it may shake up the housing market in a good way by introducing new buyers to those who wish to sell their homes in markets like Cambridge.
Of course, passing a bill could take quite a long time. That’s why it may be wise to contact Cambridge Sage if you need help buying or selling your property now instead of a few months or years in the future. At Cambridge Sage, we can help you connect with the perfect buyer for your property or find you a great home in the Cambridge area. Contact us today and let’s get started.