First-time home buyer tax breaks at the federal level are not a single credit but a set of benefits you can stack: a Mortgage Credit Certificate from your state housing agency, a penalty-free IRA withdrawal of up to $10,000 toward the purchase, deductions for mortgage interest and property taxes, a one-year deduction for mortgage points paid at closing, and credits for energy-efficient improvements once you move in. Two of these — the Mortgage Credit Certificate and the IRA withdrawal — are specifically for first-time buyers. The rest are available to any homeowner but tend to matter most in the first years of ownership, when interest costs and upfront expenses are highest.
Mortgage Credit Certificate: A Credit Just for First-Time Buyers
The Mortgage Credit Certificate (MCC) program is the closest thing to a dedicated federal first-time buyer credit. It gives you a tax credit — a dollar-for-dollar reduction of what you owe — equal to a percentage of the mortgage interest you pay each year. You get the certificate from your state or local housing finance agency, and you have to obtain it before you close on the loan.1FDIC. Mortgage Tax Credit Certificate (MCC)
Eligibility usually requires that you have not owned a principal residence in the past three years, and each agency sets its own income and purchase price limits. The certificate rate falls somewhere between 10% and 50%. If your rate is above 20%, the annual credit is capped at $2,000. If the rate is 20% or lower, there is no dollar cap.2Internal Revenue Service. Form 8396, Mortgage Interest Credit You claim the credit each year on Form 8396, and any interest you don’t use for the credit can still be taken as an itemized deduction.
Two conditions to know about. You have to keep the home as your primary residence. And if you sell within nine years, you may owe a recapture tax that gives back part of the benefit, calculated on Form 8828.3Internal Revenue Service. Instructions for Form 8828 If you refinance later, your MCC does not automatically transfer — the housing agency has to reissue it, and the new loan balance can’t exceed the old one.4eCFR. 26 CFR 1.25-3 – Qualified Mortgage Credit Certificate
Pulling From an IRA Without the Early Withdrawal Penalty
Federal law lets you take up to $10,000 from a traditional or Roth IRA for a first-time home purchase without paying the usual 10% early withdrawal penalty.5Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The $10,000 is a lifetime cap per person, so a married couple can each withdraw $10,000 for a combined $20,000 toward the same purchase. You have to spend the money within 120 days on the purchase price, closing costs, or construction expenses.
“First-time buyer” here has a looser meaning than the MCC’s: anyone who has not owned a principal residence in the previous two years qualifies, and the definition applies to both you and your spouse. You can also use the exception to help a child, grandchild, or parent buy a first home.
The tax treatment depends on the account. A traditional IRA withdrawal avoids the 10% penalty but is still taxable as ordinary income. With a Roth, your own contributions come out first — always tax-free and penalty-free — so many buyers never dip into earnings at all. If a Roth withdrawal does reach earnings, those earnings are penalty-free under the first-time buyer exception, but they are only tax-free if the account has been open at least five years.6Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs Without the five years, you owe income tax on the earnings portion but no penalty.
Deducting Mortgage Interest and Property Taxes
The biggest ongoing tax break for most new homeowners is the deduction for mortgage interest and property taxes. Both require itemizing on Schedule A, which only saves money when your total itemized deductions beat the standard deduction. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 First-time buyers often clear that bar because interest dominates the early years of a mortgage payment.
You can deduct interest on up to $750,000 of mortgage debt, or $375,000 if married filing separately, for loans taken out after December 15, 2017.8Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction Balances above the limit yield only a proportional deduction.
Property taxes fall under the state and local tax (SALT) deduction. For 2026 the SALT cap is $40,400, or $20,200 for married filing separately, covering the combined total of property taxes plus either state income tax or state sales tax.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The cap phases down for taxpayers with modified adjusted gross income above $505,000, shrinking by 30 cents for every dollar over that threshold. Keep your settlement statement and property tax bills; you’ll need the numbers at tax time.
Deducting Mortgage Points in the Year You Close
Points, also called discount points or loan origination fees, are upfront charges typically equal to 1% of the loan amount each. On a purchase of your main home, you can generally deduct the full cost of points in the year of closing rather than spreading it over the life of the loan.10Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
Full first-year deduction requires that the loan is for your main home, that paying points is customary in your area, that you brought funds to closing at least equal to the points, and that the points appear clearly on your settlement statement.11Internal Revenue Service. Topic No. 504, Home Mortgage Points If the seller pays your points, you can still deduct them, but you must reduce your home’s cost basis by the same amount.
Not every closing cost qualifies. Appraisal fees, credit report fees, and title insurance are not deductible and cannot be added to your basis. Owner’s title insurance can be added to basis, which may cut a future capital gains tax when you sell.
Energy-Efficient Home Improvement Credit
Once you own the home, the Section 25C credit covers 30% of the cost of qualifying energy-efficient upgrades, capped at $1,200 per year for most improvements.12Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit Heat pumps and biomass stoves have a separate $2,000 annual credit that sits on top of the $1,200, so the total ceiling is $3,200 in a year.13Internal Revenue Service. Home Energy Tax Credits
Qualifying work includes insulation, exterior windows and doors, central air conditioning, water heaters, and electrical panel upgrades. There is no lifetime cap, so spreading upgrades across years lets you claim the credit each time. One boundary: the separate Residential Clean Energy Credit that covered 30% of solar panel installations expired after December 31, 2025, and is not available for systems placed in service in 2026.14Internal Revenue Service. Residential Clean Energy Credit
Down Payment Assistance and State Programs
State and local housing agencies run their own programs, some of which mirror the federal MCC and some of which give a one-time state credit. Terms, income limits, and funding windows vary, so contact your state housing finance agency early.
A down payment assistance grant is generally not treated as taxable income by the IRS.15Internal Revenue Service. Down Payment Assistance Programs – Assistance Generally Not Included in Homebuyers Income If the assistance comes from a seller-funded program, though, you reduce your home’s cost basis by that amount, which can raise your taxable gain when you eventually sell.
The Capital Gains Exclusion When You Sell
This one is not an immediate break, but it affects how long you’ll want to stay. When you sell a home you have owned and lived in for at least two of the five years before the sale, you can exclude up to $250,000 of profit from income, or $500,000 for married couples filing jointly.16Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence For most first-time buyers, that covers all the appreciation.
If you sell before hitting two years, a partial exclusion is still possible in three situations:
- A work-related move to a job at least 50 miles farther from the home than your previous workplace.
- A health-related move recommended by a doctor, or a move to care for a family member with a health condition.
- An unforeseeable event such as the home being destroyed or your becoming eligible for unemployment benefits.
The partial exclusion is prorated by the fraction of the two-year period you actually met. One year in the home before a qualifying job relocation, for example, gets a single filer up to $125,000 in excluded gain.17Internal Revenue Service. Publication 523 (2024), Selling Your Home