Tax Breaks You May Get as a First-Time Homebuyer

What tax breaks exist for first-time homebuyers

The federal government does not offer a single "first-time homebuyer tax break" that applies to everyone. Instead, there are several separate tax deductions and credits that may reduce what you owe, depending on your income, where you live, and what you're buying. The most common is the mortgage interest deduction, which lets you deduct the interest you pay on your mortgage from your taxable income — but you only benefit if you itemize deductions on your tax return rather than taking the standard deduction, which most people do.

Beyond the mortgage interest deduction, the main federal benefit is the ability to withdraw up to $10,000 from a traditional or Roth IRA penalty-free if you're a first-time buyer, though this is a one-time withdrawal and you still owe income tax on the amount. Some states and cities offer their own credits or deductions. Your actual tax savings depend on your tax bracket, your loan amount, and whether you itemize — which is why talking to a tax professional before you buy makes a real difference.

Key Takeaways

• The mortgage interest deduction only saves you money if you itemize deductions, which most homebuyers do not do because the standard deduction is larger.
• You can withdraw up to $10,000 from an IRA penalty-free as a first-time buyer, but you still owe income tax on that withdrawal.
• State and local tax breaks vary widely — some states offer credits or deductions, while others offer nothing.
• Your actual tax savings depend on your income, loan size, and tax situation, so consulting a tax professional before buying helps you plan accurately.

The mortgage interest deduction and whether it helps you

The mortgage interest deduction allows you to deduct the interest portion of your mortgage payments from your taxable income. In the first years of a 30-year mortgage, most of your payment goes toward interest rather than principal, so the deduction can be substantial. However, you only benefit if you itemize deductions on your tax return — meaning you list out individual deductions rather than taking the standard deduction.

The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. If your mortgage interest plus other deductible expenses (like state and local taxes, charitable donations, and medical expenses) add up to more than the standard deduction, itemizing saves you money. For most first-time buyers with moderate incomes, the standard deduction is larger, so they do not benefit from itemizing. A tax professional can calculate whether itemizing makes sense for your situation.

The deduction also has limits: you can only deduct interest on up to $750,000 of mortgage debt (or $375,000 if married filing separately), and the loan must be secured by your home. If you refinance, the deduction applies to the new loan as long as it meets these rules.

Withdrawing from your IRA as a first-time buyer

If you have a traditional or Roth IRA, you can withdraw up to $10,000 penalty-free to pay for may have access to first-time homebuying expenses — including the down payment, closing costs, and certain repairs needed before you move in. This is a one-time withdrawal over your lifetime, so you cannot use it again even if you buy another home later.

The catch is that you still owe income tax on the withdrawal from a traditional IRA, because that money was never taxed when you contributed it. Withdrawals from a Roth IRA are tax-free if you meet certain conditions, but the $10,000 limit still applies. If you are under 59½, this withdrawal avoids the 10 percent early withdrawal penalty that normally applies to IRA withdrawals, but the income tax is separate.

This option works best if you have IRA savings you can spare and you are in a lower tax bracket than you expect to be in later years. If you are in a high tax bracket now, the income tax on the withdrawal could be substantial, so weigh that against other ways to fund your down payment.

State and local tax breaks for homebuyers

Several states offer their own tax credits or deductions for first-time homebuyers, but the programs vary widely and change year to year. Some states offer a one-time tax credit that reduces your state income tax bill by a set amount or a percentage of your down payment. Others offer deductions similar to the federal mortgage interest deduction. A few states offer nothing.

To find out whether your state has a program, contact your state's department of revenue or housing authority — both can tell you what is currently available and whether you meet the income or purchase price limits. Some programs are only open during certain months or until funding runs out, so timing matters. Local governments sometimes offer credits too, particularly in cities with high housing costs.

State and local programs often have stricter income limits than federal programs, and some require you to buy in a specific area or buy a home under a certain price. Read the rules carefully before you assume you may have access to.

How the down payment assistance and tax breaks interact

If you received down payment assistance through a grant or forgivable loan program, that money does not count as taxable income, so it does not affect your tax return. However, if you borrowed money from family or took out a personal loan to fund your down payment, that borrowed money is not deductible either — only the mortgage interest itself is deductible.

Some down payment assistance programs come with restrictions on when you can sell or refinance. Those restrictions do not affect your taxes, but they do affect your finances, so keep track of any agreements you signed. If you used IRA funds for your down payment, that withdrawal still counts toward your $10,000 lifetime limit even if you also received a grant.

What to do before you buy to maximize your tax situation

Before you make an offer, talk to a tax professional — either a CPA or an enrolled agent — about your specific situation. They can calculate whether itemizing deductions makes sense for you, estimate how much the mortgage interest deduction might save you, and tell you whether an IRA withdrawal fits your overall tax plan. This conversation costs money upfront but often saves more than it costs.

If you are considering an IRA withdrawal, do it before you close on the home so the funds are ready. The withdrawal itself takes a few days to a week, depending on your bank. If you are looking at state or local credits, check the rules before you buy — some programs have purchase price limits or require you to close by a certain date.

Keep all your closing documents, mortgage statements, and receipts for home repairs. You will need them to support any deductions you claim, and the IRS can ask for proof years later.

Frequently Asked Questions

Can I deduct my down payment or closing costs?

No. Your down payment is not deductible because it is not an expense — it is money you are putting toward the purchase price. Closing costs like appraisal fees, title insurance, and loan origination fees are also not deductible. Only the interest portion of your mortgage payments is deductible, and only if you itemize.

What counts as a "first-time homebuyer" for tax purposes?

The IRS defines a first-time homebuyer as someone who has not owned a home in the past two years. If you are married, both spouses must meet this rule. Some state and local programs have different definitions, so check the specific program rules.

If I withdraw from my IRA, do I have to report it on my taxes?

Yes. Your bank will send you a 1099-R form reporting the withdrawal. You report it on your tax return, and you owe income tax on the amount (for traditional IRAs). The penalty is waived, but the tax is not.

Can I claim the mortgage interest deduction if I am married and file separately?

You can, but it usually costs you more in taxes overall. The standard deduction is lower for married filing separately ($14,600 each in 2024), and you cannot claim certain other credits. Talk to a tax professional before you decide how to file.

Do I lose the mortgage interest deduction if I refinance?

No, as long as the new loan is secured by your home and does not exceed $750,000 in principal. The deduction applies to the interest on the refinanced loan just as it did on the original loan.