What is a Homebuyer Tax Credit?

A homebuyer tax credit is an allowance for taxpayers who have purchased a home in the previous tax year. This type of credit is usually subject to certain restrictions and caps, and may not be available every year. A government may issue a homebuyer tax credit to stimulate the housing market or encourage buying in particular market, such as newly-constructed homes or energy efficient dwellings.

Each time a government issues a homebuyer tax credit, the requirements and terms may be slightly different. Generally, the home must be fully purchased within a specified period during the previous tax year. Most homebuyer tax credits are subject to income caps, so that the credit is applied toward the purchase of homes by individuals who are not well-off. The credit is also capped at a certain maximum amount; not all buyers may be eligible to take the full credit.

A homebuyer tax credit may sometimes actually be a tax deduction. While this can still provide savings for qualified buyers, a deduction works differently than a credit when determining income tax. A homebuyer tax deduction removes a certain amount of money from the taxable income of a taxpayer, meaning that the amount taxed is lower. A homebuyer tax credit, by contrast, goes directly toward the tax owed by the taxpayer, reducing the amount sent back to the government.

Some homebuyer tax credits are also considered refundable credits. Some people, particular those in lower income brackets, may not have to pay taxes to the government. Instead, these individuals may actually receive a tax refund, depending on their income, number dependents, and the amount of tax deductions and credits claimed. A refundable homebuyer credit allows the taxpayer to be refunded the amount of the credit, since he or she does not have a tax burden to pay.

Some home tax credits may only be used for certain types of purchases. First-time homebuyer credits are given to buyers who have never owned a home before, while move-up or repeat credits are given to buyers that have already owned at least one home. Often, the home purchased must be used as the primary residence of the taxpayer claiming the credit, and cannot be applied toward purchases meant to be resold or those bought for relatives or children. Some credits may also be designed to assist a segment of the housing market, such as green building, and cannot be used for a non-qualifying purchase.