Buying a home is a major investment, and it can be both exciting and challenging due to the sheer size of the transaction. You may be familiar with homeowner tax breaks like the mortgage interest deduction, but there are other tax incentives that become available when you buy a home. In this article, we’ll discuss six ways to use your home purchase to reduce your tax liability.
1. The Mortgage Credit Certificate
The Mortgage Credit Certificate (MCC) allows homebuyers to claim a dollar-for-dollar tax credit for a portion of their mortgage interest, up to $2,000 per year.
To qualify, you must meet certain income requirements set by the IRS and have a state-issued MCC. Since this program is for low to moderate first-time homebuyers, you can’t earn more than the median income in your state. The MCC application process varies by state, but you should be able to apply for the MCC through your lender when you take out a mortgage. Your lender will issue the certificate before closing on your home. There are some costs associated with the application, so you may want to speak with your lender to determine if the MCC is right for you.
When an MCC is issued, you’ll use Form 8396 to claim a tax credit based on your mortgage amount, interest rate, and MCC percentage. This rate is set by the Housing Finance Agency (HFA) and usually ranges from 10 to 50%. Here’s an example of how the credit is calculated:
200,000 (mortgage amount) x 4% (interest rate) x 20% (MCC percentage) = $1,600
2. State-level incentives
Most states offer incentives for buying a new home. For example, Georgia has the Georgia Dream program, and Texas has the My First Texas Home program. Each of these programs is for first-time homebuyers and usually helps you to get a mortgage with a small down payment.
Go to your state’s department of housing website to learn more about your individual incentives, or you can visit the federal department of housing website to see them all narrowed down by state.
3. Local property tax deductions
A property tax deduction is a type of state and local tax that can be deducted from federal income taxes. Property tax includes real estate taxes as well. Starting in 2025, the deduction cap increases to $40,000 for income under $250,000 for single filers and $500,000 for married filing jointly. For higher incomes, the cap is gradually reduced.
4. Penalty-free IRA payouts
If you have an IRA or other pre-tax retirement savings account, you might be able to withdraw some of that money to help pay for your first home. Because these accounts are meant to be used when you reach the age of 59.5, there are usually fees associated with early withdrawals.
But if you are buying your first home, you can deduct $10,000 from your traditional IRA without a penalty. Your spouse can also withdraw $10,000 from their account for the same purchase. If you have a Roth IRA, you can withdraw contributions you have made penalty-free at any time.
If your account is at least five years old, your withdrawal will also be tax-free. This should be a last resort because it will take time to build your savings back up.
5. Home improvements
Certain home improvements you make to your new home can qualify for the Residential Renewable Energy Tax Credit. If you install any solar panels, geothermal heat pumps, small wind energy systems, or other qualifying home improvements, you can claim this credit on your tax return.
You may also qualify for the Energy Efficient Home Improvement Credit for energy-efficient appliances and exterior upgrades worth up to $3,200. Under the provisions of the One Big Beautiful Bill (OBBB), these credits expire after December 31, 2025.
6. Capital gains
When you go to sell your first home, you might be able to exclude any capital gains on your tax return. You can qualify for up to $250,000 if single and $500,000 if married filing jointly. To qualify you must consider the home your primary residence for 2 out of the 5 years leading up to the sale. You also must not have sold or claimed capitals gains on another home sale within two years of this one.
For more information about tax breaks for renters and homeowners, check out our infographic below.
Who qualifies as a first-time homebuyer?
According to the U.S. Department of Housing and Urban Development (HUD), a first-time homebuyer is someone who meets any of the following criteria:
- An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse.
- A single parent who has only owned a home with a former spouse while married.
- An individual who is a displaced homemaker who has only owned a home with a spouse.
- An individual whose only principal residence was not affixed to a foundation, such as a mobile home.
- An individual who has only owned property that was not in compliance with building regulations – and which cannot be brought into compliance for less than the cost of constructing a permanent structure.
First-time homebuyers can claim tax benefits during the first tax year after their home purchase is completed. For example, homeowners who purchased their first home in 2024 can claim eligible tax benefits in 2025, when they file taxes for the 2024 tax year.
What happened to the first-time homebuyer tax credit?
The First-time Homebuyer Act was first introduced in 2021. The act aimed to provide first-time homebuyers with a tax credit worth up to $15,000 or 10% of a home’s purchase price. As of 2024, the First-time Homebuyer Act has stalled in Congress.
The Mortgage Relief Credit was introduced in March of 2024. The credit aims to provide qualifying homeowners a tax credit worth $5,000 a year for two years. This would reduce the average homeowner’s mortgage by 1.5%. Congress is currently considering this proposal.
More need-to-know tax breaks
You can claim more tax breaks based on your unique tax situation. Some popular deductions and credits include:
- Self-employed deductions – If you’re self-employed, you can deduct expenses incurred to do your job if they’re considered ordinary and necessary to earn income.
- Student loan interest deduction – If you meet the requirements, you can deduct up to $2,500 worth of student loan interest on your tax return.
- Lifetime Learning Credit – If you’re thinking about going back to school, there’s good news! You can claim a credit of up to $2,000 per year as long as no one claims you as a dependent.
- Tax deduction for charitable donations – The IRS allows you to deduct certain charitable contributions worth up to 60% of your AGI.
TaxSlayer can help identify all the tax breaks required for you to score your maximum refund. Start for free today!
