First-Time Homebuyer Tax Credit

What Was the First-Time Homebuyer Tax Credit?

The federal first-time homebuyer tax credit was available to Americans purchasing their first homes from April 2008 through September 2010. It has expired, but prospective homeowners can still use a number of other federal policies and programs that encourage homeownership. In addition, most states have programs designed to help first-time homebuyers get the deal done.

Understanding the First-Time Homebuyer Tax Credit

The federal first-time homebuyer tax credit was part of the massive effort to bail out the U.S. economy during the Great Recession that began in 2007–2008. It applied to home purchases made by qualified first-time buyers between April 9, 2008, and July 1, 2009. The Obama administration extended the original time frame, giving buyers until Sept. 30, 2010, to close the transaction.

The Deal in Depth

The first-time homebuyer tax credit allowed a tax credit for a percentage of the purchase price of a home for taxpayers who had not owned their homes in the previous three years. The original program implemented a credit of 10% of the home's purchase price, up to $7,500, which had to be repaid over 15 years in equal installments.

The program timed out with homes that were in signed contracts by May 1, 2010, and closed by Sept. 30, 2010.

Who Was Eligible

The first-time homebuyer tax credit applied only to homebuyers with incomes under a set level. When the program began, an individual homebuyer was required to have a modified adjusted gross income (MAGI) of $75,000 to $95,000. The cap for a married couple filing jointly was $150,000.

This limit was raised periodically, reaching $125,000 for an individual and $225,000 for a couple in 2010.

The first-time homebuyer tax credit was claimed on Internal Revenue Service (IRS) Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.

Reporting the Repayment

If required to repay the first-time homebuyer credit, you must file a federal income tax return, even if the gross income doesn't exceed the return filing threshold. If you made a qualifying home purchase in 2008 and owned and used the home as a principal residence in all of 2020, you must enter the additional federal income tax on Schedule 2 (Form 1040 or 1040-SR), Additional Taxes.

You don't need to attach Form 5405, Repayment of the First-Time Homebuyer Credit. If you dispose of the home or if you (and your spouse if married) stopped using it as your principal residence in 2020, you must attach a completed Form 5405 for you (and your spouse if married) to Form 1040 or Form 1040-SR.

This information should be added because many individuals do not file when their income falls below the threshold for the tax year. Adding this information puts potential credit recipients on alert of the reporting requirements.

The Reasoning Behind the Credit

The housing bubble of the early 2000s was largely caused by dubious mortgage lending practices that became common in the mid-2000s. The primary target market was struggling wage-earners eager for homeownership who were encouraged to borrow more money than they could realistically repay.

The first-time homebuyer tax credit was created to help stabilize a real estate market that went into freefall as a result of the subprime mortgage lending crisis. With waves of mortgage defaults and foreclosures, new home buyers were hesitant to enter the market, and consumer confidence was at a low.

The tax credit was a simple way for the government to offset closing costs and moving costs to get first-time homebuyers into a home without increasing the risk to either the homebuyer or the mortgage lender.