What tax credits exist for home buyers

The main federal tax credit for buying a house is the First-Time Homebuyer Credit, but it is no longer available for most purchases. That credit ended in 2010. However, several other tax benefits exist when you own a home, and some explore specifically to the purchase itself.

The most common benefit is the mortgage interest deduction, which lets you deduct the interest you pay on your mortgage from your taxable income — but this is a deduction, not a credit, and it only helps if you itemize deductions on your tax return rather than taking the standard deduction. A credit directly reduces the tax you owe, dollar for dollar. A deduction reduces the income that gets taxed.

A few states and some local governments offer their own first-time buyer credits or deductions, so the answer depends partly on where you live. There is also a one-time credit available if you have a child or dependent, but that is not specific to buying a house.

Key Takeaways

  • The federal First-Time Homebuyer Credit expired in 2010 and is not available for purchases made after that year.
  • The mortgage interest deduction reduces your taxable income if you itemize deductions, but only on interest paid, not on principal.
  • You can deduct property taxes paid on your home, up to $10,000 per year in total state and local taxes combined.
  • Some states and cities offer their own first-time buyer credits or down payment information programs with tax benefits — check your state revenue department website.
  • The Child Tax Credit is available to many homebuyers with children, but it is not tied to the purchase itself.

Mortgage interest deduction and how it works

If you itemize deductions on your federal tax return, you can deduct the interest portion of your mortgage payments. This is one of the largest deductions available to homeowners. The deduction applies to mortgages up to $750,000 in principal (or $1 million if you took out the mortgage before December 16, 2017).

The catch is that you must itemize deductions to use it. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. If your mortgage interest plus other deductible expenses (property taxes, charitable donations, medical expenses) do not add up to more than the standard deduction, you will not benefit from itemizing. Many homeowners, especially those with newer mortgages or smaller loans, find that the standard deduction is larger.

Your mortgage lender sends you a Form 1098 each January showing how much interest you paid the previous year. You report this on Schedule A when you file your taxes.

Property tax deduction

You can also deduct property taxes you pay on your home, but there is a limit. The State and Local Tax (SALT) deduction caps your total deduction for state income taxes, sales taxes, and property taxes combined at $10,000 per year. This limit applies whether you are single or married filing jointly.

In states with high property taxes, this $10,000 cap means many homeowners cannot deduct all the property tax they pay. You will need to decide whether to deduct property taxes or state income taxes — you cannot deduct both in full if your combined total exceeds $10,000.

Like the mortgage interest deduction, the property tax deduction only helps if you itemize. Your property tax bill or assessment notice shows the amount you paid during the year.

State and local first-time buyer programs

Several states offer their own tax credits or deductions for first-time homebuyers. These vary widely by state and sometimes by county or city. Some programs offer a one-time credit of a few hundred to a few thousand dollars. Others provide down payment information that may have tax implications.

To find out whether your state has a program, visit your state's revenue or taxation department website and search for "first-time homebuyer" or "homebuyer tax credit." You can also contact your state's housing finance agency, which often administers these programs. The National Council of State Housing Agencies (NCSHA) maintains a directory of state programs.

Some programs are funded through tax credits that developers or lenders claim, which can lower your purchase price or interest rate rather than giving you a direct tax benefit. Others are grants or down payment information with no tax consequence. Reading the program details carefully will tell you whether the benefit shows up on your tax return.

Child Tax Credit when you buy a home

The Child Tax Credit is worth up to $2,000 per child under 17, and many homebuyers with children can claim it. However, the credit is not tied to buying a house — you can claim it whether you rent or own. It is worth mentioning here because buying a home often coincides with raising a family, and the credit can significantly reduce your tax bill.

To claim the Child Tax Credit, your child must be a U.S. citizen, national, or resident alien, and you must provide their Social Security number on your tax return. Income limits explore, and they change each year. The IRS website has a tool to help you determine whether you may have access to.

Capital gains exclusion when you sell

While this is not a credit or deduction at purchase, it is worth knowing: when you sell your home, you may not owe tax on the profit. The Section 121 exclusion lets you exclude up to $250,000 of gain from tax if you are single, or $500,000 if you are married filing jointly. You must have owned and lived in the home for at least two of the five years before the sale.

This is one of the most valuable tax benefits of homeownership, even though it applies when you sell, not when you buy. It means that if you bought a house for $300,000 and sold it for $500,000, a single person would owe no federal tax on the $200,000 gain (because it is less than $250,000).

What does not count as a tax credit for buying

Several things homebuyers sometimes think are tax credits are actually not. Down payment information programs, even if they are government-funded, usually do not create a tax credit — they are a grant or loan that reduces what you pay upfront. Closing cost information works the same way.

Energy-efficient home improvements can may have access to for a tax credit (the Residential Energy Credit), but only if you make the improvements after you buy the house. Buying a home that is already energy-efficient does not trigger the credit. The improvements must meet specific standards set by the IRS.

Homebuyer education courses, even if they are required by a down payment information program, do not create a tax credit. They are a requirement to receive the information, but the information itself is what reduces your out-of-pocket cost.

Frequently Asked Questions

Can I claim a tax credit if I bought my house before 2010?

If you bought between April 9, 2008 and June 30, 2009, you may have been able to claim the First-Time Homebuyer Credit on your 2009 or 2010 tax return. If you did not claim it then, you cannot claim it now. If you did claim it and later sold the home within three years, you may owe back some or all of the credit. Check your old tax returns or contact the IRS if you are unsure.

Does buying a house let me claim a bigger standard deduction?

No. The standard deduction is the same whether you rent or own. However, if you itemize deductions instead of taking the standard deduction, you can deduct mortgage interest and property taxes, which may result in a lower tax bill overall.

What if I bought a house with my partner but we are not married?

You each file your own tax return. You can each deduct your share of the mortgage interest and property taxes based on how the deed is titled and how you split the payments. Consult a tax professional to make sure you split deductions correctly, because the IRS has specific rules for unmarried co-owners.

Are there any tax credits for energy-efficient homes?

The Residential Energy Credit applies to improvements you make after buying, not to the purchase itself. If you install solar panels, a heat pump, or other may have access to improvements, you may be able to claim a credit. The improvements must meet IRS standards, and you will need documentation from the installer.

Do I have to report the down payment information I received as income?

Most down payment information programs are structured as grants or forgivable loans, which means they are not taxable income. However, some programs may have different rules. Check the paperwork from your program or ask your lender whether the information is taxable. If it is, you will receive a Form 1099 from the program.