First Time Home Buyer Information: Tax Benefits for First Time Home Buyers

First Time Home Buyer Information - Who is a First Time Home Buyer?

A person who has not owned a primary residence for three years prior to purchasing a new home, qualifies as a first time home buyer. A displaced homemaker or a single parent who has owned a home jointly with a former spouse is also considered a first time home buyer. In case one owns a primary residence, that has not been affixed to a permanent foundation in accordance with applicable housing regulations, one qualifies as a first time home buyer. An individual can also qualify as a first time home buyer if the property owned previously does not comply with the state, local or model building code and the cost of ensuring compliance would result in the homeowner having to spend more than the cost of buying a permanent structure. A number of tax breaks are available to first time home buyers.

First Time Home Buyer Tax Benefits

Tax Credit for Home Purchased In 2009: The Housing and Economic Recovery Act of 2008, had set the maximum tax credit for homes purchased between April 8, 2008 and before July 1, 2009 at $7500. The American Recovery and Reinvestment Act of 2009, increased the maximum amount of tax credit to $8000 from $7500, for couples purchasing a home before December 1st, 2009, assuming that the couples file jointly. The maximum credit for married people filing independently was also increased to $4000 from $3750. The tax credit, for homes purchased in 2009, is for the buyer to keep as long as the home is used as a primary residence for at least 3 years from the date of purchase. Moreover, the Federal Housing Administration (FHA) is allowing borrowers to procure a short term loan from housing finance agencies in anticipation of the $8000 tax credit and apply it towards down payment on an FHA Insured Loan. First time home buyer tax credit is meant to give a boost to the housing market.

Tax Benefits Available to All Home buyers

Points are Deductible: Paying points on a mortgage loan refers to paying, upfront, a certain amount of money that is calculated depending upon the mortgage loan. These points reduce the amount of interest that has to be paid on the loan.

One point= 1%*(Mortgage Loan)

Points are tax deductible, provided they are reasonable and in accordance with the established practice of paying points on mortgage loans. Moreover, points should have been paid in order to buy or build a primary residence. Paying points for refinancing a loan also makes one eligible for tax deductions.

Deductible Real Estate Taxes: If the home is not purchased in the beginning of the tax year, real estate taxes are structured such that the buyer and the seller pay taxes for the part of the property tax year when the home was owned by them. The home buyer's share of taxes are fully deductible (for the year the home was purchased). Monthly mortgage payments, that the homeowner makes to the lender, are generally placed in an escrow account. Real estate taxes, that the lender pays from the escrow to the tax authority, can be deducted by the home buyer.

Mortgage Interest Payments are Tax Deductible: On buying a home, buyers can deduct the entire amount of mortgage interest payments, that have to be made on a monthly basis, before paying taxes provided the worth of the home is less than $1 million (or $500,000) in case of couples married and filing jointly (or single/married and filing independently).

Refinancing Interest is Tax Deductible: In case a person decides to avail a HEL (Home Equity Loan), or a HELOC (Home Equity Line of Credit), by borrowing against the built up equity on the house, the interest on loans is again tax deductible. However, the amount of the loan combined with the first mortgage should not exceed the worth of the house.

First time home buyer tax benefits are meant to help people buy their first home without much hassle. In fact, people can also withdraw up to $10,000 (once in a lifetime) from their Individual Retirement Account (IRA) to buy a first-time home without paying a penalty of 10% to the Internal Revenue Service (IRS) for early withdrawal.