First-Time Homebuyer Tax Credit: Meaning, Eligibility

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.

Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.

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.

Key Takeaways

• The federal first-time homebuyer tax credit was an incentive program that ended in 2010.
• If you are a first-time homebuyer, there are other federal and state programs that can help make the purchase possible.
• It was one of the best-known programs is the FHA-backed mortgage.

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.

An expanded version of the tax credit later increased the maximum to $8,000 and removed the repayment requirement altogether.

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 2023, 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 2023, 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.

1. Congressional Research Service. "An Economic Analysis of the Homebuyer Tax Credit." Pages 2-3.
2. Library of Congress. “Chronological List of Presidents, First Ladies, and Vice Presidents of the United States.”
3. Congressional Research Service. "An Economic Analysis of the Homebuyer Tax Credit." Page 2.
4. Congressional Research Service. "An Economic Analysis of the Homebuyer Tax Credit." Page 3.
5. Internal Revenue Service. "First-Time Homebuyer Credit Extended to April 30, 2010; Some Current Homeowners Now Also Qualify."
6. Internal Revenue Service. "Topic No. 611, Repayment of the First-Time Homebuyer Credit."

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