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Originally Published: Mar 12, 2024
Originally Published: Mar 12, 2024 Last Updated: Mar 22, 2024 8 min read
President Biden proposes Homebuyer tax credit
Money; Getty Images

The housing market is receiving some high-level attention that could improve the odds of many Americans becoming homeowners — by putting money in their pockets.

During his State of the Union address Thursday, President Joe Biden acknowledged the difficulties homebuyers face because of high mortgage rates and a lack of inventory. He also said that while rates are on a downward trend, he’s “not waiting” for them to drop lower before providing some relief from the high cost of housing.

To that end, Biden announced a plan to address housing affordability by providing $10,000 tax credits for first-time and repeat homebuyers.

Here’s what you need to know.

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Who would qualify for Biden's homebuyer tax credits?

Though his plan also includes an initiative to increase the number of available homes, the main focus has been on Biden’s proposed tax credits, also known as mortgage relief credits. There are two: one for potential homebuyers, intended to increase affordability, and one for homeowners, intended to help stimulate the number of new listings, which could eventually bring down home prices.

The plan would provide a $10,000 tax credit, divided into two $5,000 annual installments, for first-time homebuyers purchasing property in 2024 and 2025. Tax credits decrease your income tax liability or, in some cases, increase your refund.

According to data from Realtor.com, the $5,000 annual credit would be worth about $400 per month on mortgage payments. That’s a significant discount: The typical monthly mortgage payment is around $2,100.

The effect of the homebuyer credit would be similar to obtaining a lower mortgage rate — the White House estimates the short-term savings would be equivalent to reducing today’s current mortgage rates by about 1.5 percentage points. Per the Biden administration, it could help 3.5 million families buy their first home.

Biden is also proposing a one-year, $10,000 tax credit for homeowners who may be interested in selling their homes but feel “locked in” by their low mortgage rates. This credit would apply to middle-class owners who sell their starter homes (defined as homes priced below the area's median home price). According to White House estimates, this proposal could free up 3 million affordable homes.

Both tax credits are geared toward middle-class, first-time buyers and homeowners. Qualifying buyers are those who earn less than $200,000 and who buy a home from a non-relative to use as a primary residence, do not currently own property and have not bought a home during the previous three tax years. Sellers who qualify for the tax credits are those who own the home during the current and previous tax years and sell to an unrelated party.

History of homebuyer tax credits

This is not the first time the federal government has used (or tried to use) tax credits as an incentive to increase homeownership.

In 2008, then-President George W. Bush introduced a housing tax credit that offered a maximum of $7,500 for buyers purchasing their first home between 2008 and 2010. The goal of the credit was to stimulate activity in the housing market, which had gone into a free fall two years earlier as part of the Great Recession.

However, this “credit” worked more as an interest-free loan that had to be repaid over 15 years. In 2009, then-President Barack Obama expanded the first-time buyer incentive, turning it into a true tax credit that didn’t have to be repaid and bumping up the credit to $8,000, although the program still expired in 2010.

In 2021, Biden proposed a $15,000 first-time homebuyer tax credit, which formed the basis for his current proposal. That bill, however, never became law.

While most experts agree that the president's latest proposal could help more Americans become first-time homeowners, some say they worry that more buyers entering the market could push home prices higher.

In the Realtor.com report, chief economist Danielle Hale noted that the homebuyer tax credits could lead to more competition in an already tight market. Without an increase in housing supply, she wrote, “this tax credit could bring out more buyers, there aren’t more homes for sale, and home prices go up.”

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Existing tax credits for homebuyers

There currently aren’t any tax credit programs similar to Biden’s proposal, but that doesn’t mean first-time buyers can’t get a tax break.

First-time homebuyers can apply for a mortgage credit certificate from their lender, which allows a homeowner to deduct a percentage of the interest paid on the home loan and receive a credit or refund of up to $2,000.

There are also homebuying costs that can be deducted from your taxes to reduce the amount you have to pay, as long as certain IRS requirements are met. These deductions include the interest paid on mortgages of up to $750,000; the cost of buying mortgage points; loan origination fees; and property taxes.

Homebuyers interested in learning about tax credits and deductions related to a home purchase should consult with a tax professional or the IRS.

Will the homebuyer tax credits pass?

After Biden’s Thursday announcement, industry experts applauded the proposals as a welcome spotlight on the importance of housing affordability. According to Marty Green, principal at mortgage law firm Polunsky Beitel Green, the housing market “is too critical to our economy and as a wealth builder for Americans to be ignored.”

Of course, Congress must discuss and approve the plan (likely with several changes along the way) before it can become law, and there’s no guarantee it will be approved.

However, Green calls the fact that housing policy has returned to the forefront of the political debate a "positive development."

Will a builder tax credit improve housing inventory?

Another part of Biden’s plan addresses the supply issue homebuyers face by proposing a new Neighborhood Homes Tax Credit, which is designed to incentivize the building or renovation of affordable homes in neighborhoods nationwide.

However, building enough homes in a short time to impact today's housing market significantly is a challenge. Orphe Divounguy, senior macroeconomist at Zillow Home Loans, says builders face several headwinds when putting up homes fast enough to impact the housing supply.

These obstacles include a shortage of skilled labor in the construction industry, the scarcity of buildable land, increased land costs and outdated zoning regulations that limit the number of units that can be built in specific areas. Together, these barriers are preventing builders “from delivering the homes that are needed in the current environment,” Divounguy tells Money.

He adds that without more focus on addressing the issues facing builders — not only buyers — “it’s going to be very difficult to see affordability improve.”

This story has been updated to include information about who qualifies for the tax credits.

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This Year May Be 'Tough' for Housing Affordability — But help Is on the Way: HUD Secretary

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