Would it help? Fed legislation would create $15,000 tax credit for first-time homebuyers

Federal legislators have proposed bringing back a federal first-time homebuyer tax credit program that would offer up to a $15,000 credit to those eligible.

U.S. Senators Sheldon Whitehouse, of Rhode Island, and Sen. Martin Heinrich, of New Mexico, and two U.S. representatives proposed the bill to create a refundable tax credit worth up to $15,000 for first-time homebuyers.

The First-Time Homebuyer Tax Credit Act would make homeownership "a reality" for more Rhode Island residents, Whitehouse wrote in a statement.

What would the bill do?

The bill would create a refundable tax credit worth up to 10% of the purchase price of a house, with a maximum of $15,000. To qualify for the maximum credit, the purchase price has to be $150,000 or above.

The program would be restricted to:

• People making 150% of the area median income or less.

• Houses with a purchase price of 110% or below the area median purchase price.

• Purchases financed through a federally backed mortgage.

In 2022, 150% of the area median income was $101,550 for a single person in most of the state.

The current median purchase price in Rhode Island for January 2024 is:

• Single-family home: $441,750 (110% is $485,925)

• Condo: $325,000 (110% is $357,500)

• Multi-family home: $475,000 (110% is $522,500)

What's the difference between a tax credit and a tax deduction?

The proposed legislation creates a refundable tax credit, up to $15,000, for anyone who qualifies.

For anyone eligible for the credit, the proposed bill would allow the credit to be spaced out over a number of years.

A tax credit is a reduction in a tax bill. If one's tax bill is $20,000 and they get a $5,000 tax credit, the bill goes down to $15,000.

With a refundable tax credit, if your tax bill gets zeroed out – say, your bill was $12,000 and your credit was $15,000 – the IRS will write you a check for the $3,000 credit.

A tax deduction lowers a person's taxable income. While a tax deduction reduces a tax liability, it only does so by reducing how much income is taxed.

A $5,000 tax deduction for a single person who had a taxable income of $74,000 would reduce their federal tax bill from $11,593 to $10,493, according to 2023 IRS tax tables. Taxable income excludes the standard deduction ($13,850) as well as any other deductions, contributions to pre-tax retirement plans and, for many salaried workers, premiums for health insurance.

The bill would allow for anyone making up to 150% of the area median income to apply for the tax credit.

Standard area median income tables only go up to 120% of area median income. At 120% for a single person, the income level is $86,040. A person with a taxable income of $86,040 would receive a federal tax bill of $14,233 in 2023.

Would a $15,000 tax credit help?

Rhode Island's housing market is, by multiple metrics, bonkers, and has been since the onset of the pandemic.

The price of a single-family home is up nearly 50% since 2019. For multifamily homes, the price is up 68% and for condos, the price is more varied, up 40% in January, but up 60% in December as the median price has swung between January's $325,000 and December's $360,000.

Another metric, the number of listings, is way down. In January, 845 single-family homes were listed, compared with 2,790 listings in January 2019, a 107% decrease.

When interest rates hit record lows in 2021 and 2022, dropping below 3%, people's purchasing power increased significantly, helping to fuel the rise in sales price. Now, interest rates are at 6.88%.

That increase in interest rates knocked many people out of the market, especially as the state's $30 million of first-time home buyer grants dried up in November 2023.

"Anything that would make a home more affordable would be helpful," Rhode Island Association of Realtors President Sally Hersey said.

Help with a down payment would bring many people at the bottom of the market back in, she said.

Tax credits for home buying are not new

In 2008, 2009 and 2010, first-time homeowners could also claim a refundable tax credit from the purchase of their house, although the cap at the time was set at $7,500. That was increased to $8,000 in 2009, according to the IRS.

Rhode Island Republicans propose state tax savings plan for down payments

The Republican caucus has introduced a bill this session that would create a state tax savings plan for people trying to save up enough of a down payment for a house. The plans would operate similarly to existing 529 education savings plans run by the treasurer.

Read more about the proposal here.

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Reach reporter Wheeler Cowperthwaite at wcowperthwaite@providencejournal.com or follow him on Twitter @WheelerReporter.

This article originally appeared on The Providence Journal: The housing market is crazy. This $15K tax credit might help