What Homebuyer’s Credits are Available to Help You Get Into A Home?

by Tamila McDonald
0 comment

First Time Homebuyer Credit

Purchasing a house is a major investment. Since that’s the case, many aspiring homebuyers want to offset as much of the cost as possible. Fortunately, there are some homebuyer’s credits and deductions that can make a difference, either by reducing your tax bill or giving you access to funds for specific purposes. Here’s an overview of some of the more widely used first time homebuyer’s credits and deductions.

Homebuyer’s Credits to Help You Get into a Home

Mortgage Interest Credit

Lower-income homeowners who received a mortgage credit certificate (MCC) from a local or state government agency that subsidized the purchase of their primary home can receive credits worth up to 50 percent of the mortgage interest paid during a tax year.

The exact amount is listed on the MCC, and the total credit is capped at $2,000 for those with credit rates above 20 percent. Still, if your credit is reduced during one tax year, you can carry the rest forward for the following three years or until the full credit is used, whichever happens first.

It’s important to note that using this credit limits a homeowner’s access to other deductions. For example, you’d have to reduce your mortgage interest deduction based on the credit amount. Additionally, refinancing would mean having to get a new MCC to continue claiming this tax credit.

It’s also important to note that selling your house too soon could trigger an MCC credit repayment. How much you’d need to repay depends on how long you kept the house before selling.

Down Payment Assistance

While this isn’t a tax credit, state-sponsored down payment assistance programs can help eligible first-time homebuyers get into a house with greater ease. Usually, these are available to lower-income households who purchase a property within a specific financial limit. After taking appropriate steps – such as attending required educational courses relating to the program – participants essentially receive a grant that covers the down payment and closing costs. In some cases, there are also funds for home improvements, though the rules for that vary.

There is also a down payment assistance program available through Fannie Mae. Eligible first-time homebuyers can receive up to 3 percent in closing cost assistance on a qualifying foreclosure property that’s Fannie Mae-owned.

Mortgage Interest Deduction

Usually, this is the most widely used tax deduction for homeowners. You can deduct your mortgage interest on mortgage loans up to $375,000 or $750,000, depending on whether you file separately or jointly.

The interest amount that you paid during the year is listed on Form 1098, which you receive from your lender. If your loan amount was at or below the threshold, you can simply use the number provided to deduct the interest. However, if your lender didn’t send a Form 1098, the amount is still deductible. It’s usually also reported on Schedule A, giving you another resource.

Mortgage Point Deduction

If you pay for points on your mortgage, you can deduct their cost on your federal taxes the year you buy them. Generally, this option is only available if the associated loan is secured by your primary residence.

If you’re securing the mortgage with a second home, you can deduct the value of the points purchased over the life of the loan, so you still get a credit. While the total value of the deduction is the same, it’s only a small credit every year. For example, if you spent $1,500 on points on your second home’s loan and have a 30-year loan, you can deduct $50 each year.

Energy-Efficient Upgrades Credit

There are federal tax credits available for making specific energy-efficient upgrades to a property, including a recently purchased home. One widely used example is receiving up to 30 percent on qualifying power-related or heating-related systems, such as solar panel installations.

Through the Inflation Reduction Act, installing new energy-efficient furnaces, water heaters, doors, windows, or similar items can also result in a tax credit. However, you have to make sure that the products you purchase meet the requirements to qualify, so check the rules before choosing related upgrades if you want to capture the tax credit.

Electric Vehicle Charging Equipment Credit

Like the credit for energy-efficient home improvements, there’s a tax credit for installing an electric vehicle charging system in houses, including newly purchased primary homes. It’s worth up to 30 percent of the equipment cost or $1,000, whichever is lower. Just make sure the equipment you select is eligible, as not all systems qualify.

Medically Necessary Home Improvements Deduction

If you have to make upgrades to a newly purchased home to meet the medical needs of a resident, you can potentially deduct some of the cost of the installation. Usually, the amount you can claim is limited. It’s based on the purchase price minus the increase in home value created by the installation.

Only upgrades that are medically necessary qualify. For example, installing a ramp or widening hallways to make the house wheelchair accessible for a wheelchair user usually results in a deduction. However, making changes to simply support aging in place without a current medical need typically don’t.

Are There Any New Homebuyer’s Credits Coming?

Several lawmakers proposed a new homebuyer’s credit for first-time homebuyers. The bill – called the First-Time Homebuyer Act of 2021 – proposes offering tax credits worth up to 10 percent of a house’s purchase price up to $15,000 to eligible homebuyers. While this is potentially positive news for homebuyers, the bill isn’t yet formally passed into law.

There’s a chance the bill could become law in 2023. However, that isn’t guaranteed. As a result, first-time homebuyers shouldn’t purchase a house assuming this bill will pass. If the tax credit is critical for any home purchase. It’s better to wait for news that it officially became law before moving forward with buying a new house.

Do you plan on taking advantage of any homebuyer’s credits or deductions? o you think that now isn’t a good time to buy? Do you believe the homebuyer’s credit or deduction is a smart offering? Does it not make sense to provide this type of financial incentive? Share your thoughts in the comments below.

Read More:

 

 

Leave a Comment