Will we see a new tax credit for first-time home buyers in 2021? And if so, how will it work? Who would qualify as a “first-time buyer,” and how much of a credit might they receive?
These are just a few of the questions that have been swirling around since Joe Biden announced his housing-related proposals last year. Now that he’s president, he has an opportunity to turn those proposals into reality. With Congress’s approval, of course.
Here’s how a 2021 tax credit for first-time home buyers might work, based on the proposal language and similar programs from the past.
Proposed: a 2021 Tax Credit for First-Time Home Buyers
Let’s start with the Biden-Harris housing policy. This detailed plan offers a number of proposals that might take effect in 2021. Many of them have to do with housing affordability and “investing in our communities.” Some are meant to help stimulate our ailing economy.
You can find their full list of proposals online. Today, we’ll be focusing on the part that pushes for a first-time home buyer tax credit in 2021.
Here’s the pertinent quote from Biden’s proposal:
Help families buy their first homes and build wealth by creating a new refundable, advanceable tax credit of up to $15,000. Biden’s new First Down Payment Tax Credit will help families offset the costs of homebuying and help millions of families lay down roots for the first time. Building off of a temporary tax credit expanded as part of the Recovery Act, this tax credit will be permanent and advanceable, meaning that homebuyers receive the tax credit when they make the purchase instead of waiting to receive the assistance when they file taxes the following year.”
There’s a lot to unpack here. Let’s start with some of the most important elements mentioned above:
1. Advanceable means buyers would get the credit up front, possibly at closing.
The Biden-Harris team are proposing an “advanceable” tax credit for first-time buyers. This means home buyers would be able to claim it up front, possibly on closing day, instead of waiting until the end of the tax year when they file a return.
That would be a major advantage compared to previous (and similar) home buyer tax credits. Advanceable, in this context, means buyers could actually use the money to offset their down payment and/or closing costs.
Numerous surveys have shown that the down payment is the biggest hurdle for many first-time home buyers in the U.S. Even those with good jobs and steady income often struggle to come up with the funds needed for a down payment.
Granted, the down payment for a conventional mortgage loan can be as low as 3% for eligible borrowers. And the FHA loan program allows for 3.5% down, as a minimum. But that’s still a big chunk of change for many folks who are otherwise well qualified to take on a mortgage.
An advanceable first-time home buyer tax credit in 2021 would bring a lot of those people off the sidelines and into the real estate market.
2. The term ‘first-time buyer’ might include previous homeowners.
Take a closer look at the above quote from Biden’s tax credit proposal, and you’ll see that the word “first” appears three times in one paragraph.
They say it’s designed to “help families buy their first homes,” and that a credit like this could “help millions of families lay down roots for the first time.”
That language might be a tad misleading. It gives the impression that a 2021 tax credit for “first-time buyers” would be limited to those who have never owned a house in the past. But that’s probably not the case here.
Biden’s proposal says this tax credit would be based on one offered under the “Recovery Act.” That’s a reference to the American Recovery and Reinvestment Act of 2009, which then-President Barack Obama signed into law in the wake of the Great Recession. Among other things, that act offered an $8,000 tax credit to eligible first-time home buyers.
But the IRS website states that the 2009 tax credit was intended “for new home owners who have not owned a home in the prior three years.”
We expect to see similar requirements this time around. Instead of limiting a 2021 tax credit to buyers who are truly buying their first home, Congress and the president will probably use the three-year rule again. Time will tell.
3. It might be for $15,000, or less, depending on Congress.
The proposal language mentions a first-time home buyer tax credit of “up to $15,000.” And if it ends up being advanceable, buyers could potentially apply that money to their down payment and/or closing costs.
Congress would have to approve that amount, before it could be signed by the president. And if the 2009 home buyer tax credit is any indication, that figure might get whittled down along the way. Some within Congress proposed a $15,000 credit back in 2009. But by the time the details were hammered out, it got reduced to $8,000.
The point being, we don’t yet know how much a 2021 first-time home buyer tax credit would add up to. It could be $15,000, as Biden is seeking. Or it might be significantly less than that.
But even an $8,000 credit would be a big deal, especially if it ends up being advanceable as in the proposal.
According to Zillow, the median home value in the U.S. was around $266,000 as of January 2021. A 3% down payment (the lowest most lenders will go) on that amount would come to around $7,980. So a tax credit of $8,000 would help a lot of buyers clear the upfront costs associated with a home purchase.
We’ll Keep You Posted
This is a developing story we expect to hear more about over the coming weeks. President Biden is currently busy signing a flurry of executive actions. He also has his hands full with many other issues, including the pandemic and a sluggish vaccine rollout.
But he has championed a variety of economic stimulus measures in the past, so a potential 2021 tax credit for first-time home buyers might be high on his list of priorities.
We know this subject is a big deal to a lot of people, so we are watching it closely. You can expect more coverage from us in the weeks ahead, if and when this proposal moves forward.