With the upward trend of housing market sales continuing and housing prices nationwide looking like a bubble, first-time home buyers find it challenging to fulfill their goal of buying into the housing market.
On 28 April 2021, U.S. legislators introduced the First-Time Homebuyer Act of 2021. The bill amends the IRS tax code to provide up to $15,000 in refundable federal tax credits for first-time homebuyers.
The First-Time Homebuyer Act of 2021 intends to facilitate homeownership for low- and middle-income Americans. Currently, this bill has yet to become a law.
The First Time Homebuyer Act, if approved, would create a federal tax credit of up to $15,000, equal to 10% of the amount first-time buyers paid for their primary residence.
The tax credit is refundable, implying that if it reduces a buyer’s federal income tax liability to zero, the buyer may receive a refund for any unused portion of the credit.
What is the $15,000 First-Time Homebuyer Tax Credit?
The First-Time Homebuyer Tax Credit is part of the First-Time Homebuyer Act of 2021 and provides first-time homebuyers who meet specific criteria with a $15,000 tax credit.
The bill introduces wealth-building prospects for marginalized communities.
It fulfills one of President Biden’s key campaign pledges – to make homeownership more accessible to the millions of renters who aim it for themselves and their family members. For homebuyers to avail of this credit, the criteria required are:
- Should be a first-time home buyer.
- Should adhere to the income limitations for that specified area.
- Should buy a house to use as a primary residence, and not as an investment or a second home.
- Should be 18 years+ or married to a person who is 18 years of age.
- Should purchase the house from a non-relative.
Five Things You Should Know About the First-Time Home Buyer Tax Credit
As of 22 June 2022, the First-Time Homebuyer Tax Credit is still a bill, not a law.
Let’s understand what the $15,000 First-Time Homebuyer Tax Credit might be able to do if it passes into law, what qualifications are needed, and how it differs from other comparable programs.
The Tax Credit bill is still in the works and has not yet become law.
1) The First-Time Home Buyer Act: How Does It Work?
The $15,000 First-Time Homebuyer Tax Credit of 2021 is not a grant in cash nor a returnable loan.
The tax credit is equal to 10% of the cost of the home and does not exceed $15,000 in 2021 inflation-adjusted dollars. If we assume a 2% inflation rate, the maximum first-time home buyer tax credit will increase as follows:
- 2021: Maximum tax credit – $15,000
- 2022: Maximum tax credit – $15,300
- 2023: Maximum tax credit – $15,606
- 2024: Maximum tax credit – $15,918
- 2025: Maximum tax credit – $16,236
Any credit received by the homebuyer is adjusted against the federal tax bill or refunded.
Married couples who file their taxes separately can claim half of the available credit, while non-married buyers may claim their proportionate share of the credit.
2) When is the $15,000 Tax Credit Available?
If enacted, the only requirement for eligible first-time homebuyers would be to file a tax form. After that, they would automatically receive their tax credit. For homeowners whose tax obligation is less than $15,000, an extra amount is paid via direct transfer.
The scheme applies to all homes bought from 1 January 2021. The $15,000 tax credit can be permanent and has no set expiration date.
3) Who Can Apply For the 2021 First-Time Home Buyer Tax Credit?
Today, eligible home buyers who satisfy the following criteria can get a tax credit.
- Eligible home buyers should not have owned a house or been co-signer on any mortgage loan within the last 36 months. This comprises primary residences, vacation rentals, and second homes.
- Eligible home buyers can use the tax credit only once. For example, if they use the tax credit to purchase a home in 2020, they cannot use it again in 2026.
- The income of home buyers must not be more than 60% of the area’s median income. Households with multiple income earners, including married and unmarried joint filers, are allowed to have higher income thresholds.
- Eligible home buyers should not buy their home from a relative, including a parent, spouse, uncle, aunt, child, cousin, or grandparents. Note that the bill makes no specific recommendations on buying a house from a trust or other entity under a relative’s control.
- At the time of purchase, home buyers should be either 18 years old or married to someone who is 18 years old.
4) How to Obtain the $15,000 Tax Credit?
The First-Time Homebuyer Act of 2021 does not clearly state how to claim the tax credit.
However, the bill is identical to it. The 2021 tax credit iteration would likely follow suit, and the homebuyer must file an additional IRS form to claim the credit.
Nevertheless, there is a notable difference. The First-Time Homebuyer Act of 2021 is retroactive to 31 December 2020, allowing homebuyers to file an amended return for the prior year’s filing at any time and receive a prompt cash payment from the U.S. Treasury.
5) First-Time Home Buyers Will Be Taxed Liability If They Move or Sell Their Home Within 4 Years
The First-Time Homebuyer Act of 2021 is aimed at low- and middle-income families and seeks to use real estate to create long-term wealth.
Real estate investors or those who flip houses cannot claim this credit. Hence, buyers who use the homebuyer tax credit and shift their primary residence or sell it within four years of purchase will realize a tax liability depending on how long they held their home.
- Move or sell within Year 1: Repay 100% – $15,000
- Move or sell within Year 2: Repay 75% – $11,250
- Move or sell within Year 3: Repay 50% – $7,500
- Move or sell within Year 4: Repay 25% – $3,750
The repayment norm has some exceptions. Homebuyers who sell their property within four years to a non-relative and whose real estate profits are less than their tax liability must pay their real estate gains.
There are more exceptions like those for divorce, death, and specific military transfers.
Final Word: Biden’s First-Time Home Buyer Program
Many low- and middle-income Americans will be eligible for a tax credit for purchasing a home if The First-Time Homebuyer Act of 2021 comes into effect.
Additionally, unless the homebuyers sell the house within the first four years of ownership, the tax credit would not need to be paid back.
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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has investments in real estate.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Unsplash.