First-time Homebuyers Tax Incentives

Published on Wednesday, December 8, 2021

There are several potential tax benefits of purchasing a home. The most well-known perks are deducting property tax, mortgage interest, and mortgage insurance premiums when itemizing deductions, and gain exclusion ($250,000 single filers, $500,000 married filers) when you sell your home, if certain requirements are met. However, as a first-time home buyer, it may seem impossible to buy in today’s overwhelming market. Before those real estate listings scare you away from buying, there are some additional tax incentives to consider. Buying a home may be more attainable than you think.

Idaho First-Time Home Buyer Savings Account

First, whether you’re thinking of buying a home in the near future or if it’s in your long-term plan, open an Idaho First-Time Home Buyer Savings Account. This account allows taxpayers to deduct up to $15,000 per year ($30,000 if married filing jointly) on their Idaho tax return. Taxpayers can continue to contribute to this account up to $100,000, so it’s a great way to start saving for that future purchase while getting a tax break now. Additionally, any interest income earned is tax-exempt for Idaho. For more information check out our blog post: Idaho Tax Deduction for First-Time Home Buyers.

Mortgage Credit Certificate

The next tax incentive can be a great tool to make purchasing a home more affordable. It’s called the Mortgage Credit Certificate and is reported on Form 8396 of an individual’s tax return. This federal tax credit allows you to claim a percentage of mortgage interest paid, up to $2,000 per year – a dollar-for-dollar reduction of your tax liability! If the credit is larger than tax owed in a certain year, the remaining credit will carryforward for up to three years. Idaho limits the credit to 35% of your mortgage interest – this amount varies by state. If an Idaho resident has $10,000 of mortgage interest in a given year, the credit would be limited to $2,000. To put this in perspective, a taxpayer who receives the maximum credit is saving nearly $167 per month. These savings can be used for mortgage payments or other homeowner expenses. This is especially useful for those who take the standard deduction and wouldn’t benefit from mortgage interest normally. For those who do itemize their deductions, any remaining interest can still be deducted on Schedule A. For example, if a taxpayer has $10,000 of mortgage interest and claims the maximum $2,000 credit, they still have $8,000 they can deduct on Schedule A.

Borrowers must meet certain requirements:

• First-time home buyer (haven’t owned a home in past 3 years)
  • Note: This requirement is waived if purchasing a home in a target area
• Property sales price and annual income limits
  • Ada County
    • Price limit: $363,000
    • Income limit: $75,300 (1- or 2-person household), or $86,595 (3+ person household)
  • Canyon County
    • Price limit: $444,000
    • Income limit: $90,360 (1- or 2-person household), or $105,420 (3+ person household)
• Occupy property as primary residence

These requirements vary by state and area.

As noted above, taxpayers may be eligible if they’re first-time home buyers and depending on where they live, annual income, property cost, and household size. Each state is in charge of issuing the certificate. In Idaho, the Idaho Housing and Finance Association issues the certificate to qualified applicants after signing the necessary documents and paying the $300 application fee. The requirements by county can be found on the Idaho Housing website. If eligible, this credit is available for the life of the loan as long as the taxpayer occupies the residence. This means that even if income increases, the taxpayer is still entitled to the credit. In addition, those who refinance can transfer the certificate to the new loan with an additional application and fee, regardless of income.

With all the advantages of the Mortgage Credit Certificate, it’s important to be aware of potential drawbacks as well. With the rising costs of home ownership, many taxpayers may not be eligible. This is both in part because the sales price may exceed the limit or borrowers that need assistance may exceed the annual income limit. Another item to keep in mind is the Recapture Tax. Taxpayers who sell their home within nine years of purchase, make significantly more income than when they purchased the home, and have a gain on the sale of the home are subject to this recapture. The maximum tax that can arise in this situation is either 6.25% of the of the original principal balance of the loan or 50% of the gain on the sale of the home, whichever is less. Since the risk of recapture only affects those who sell within nine years, this impacts borrowers who don’t plan on staying in the home long-term. With that in mind, there is the possibility of reimbursement by the state; Idaho Housing will reimburse the tax in certain situations.

Make sure to consider all the potential tax benefits available to you if you’re thinking about buying a home. As always, feel free to reach out to one of our tax professionals if you have any questions. If you have specific questions, you can also contact your state housing association or lender. Additional details for Idaho can be found on the Idaho Housing and Finance Association website.

Emily Matos, CPA