Is There a First-Time Home Buyer Tax Credit? MCC and IRA Options

There is no broad federal first-time home buyer tax credit available in 2026. The original credit of up to $8,000 expired in 2010, and every replacement bill introduced since has stalled in Congress. What does exist federally is the Mortgage Credit Certificate program, which converts part of your mortgage interest into a dollar-for-dollar tax credit, plus a penalty-free IRA withdrawal option and a wide range of state and local assistance programs.

Why the Federal Credit No Longer Exists

The last direct federal tax credit for first-time buyers came through the Housing and Economic Recovery Act of 2008 and its Recovery Act expansion. It offered up to $8,000 for qualifying purchases and closed to new buyers in 2010.¹

Several bills have tried to revive it. The First-Time Homebuyer Act of 2021 proposed a refundable credit of up to $15,000 but did not advance past committee. A separate $25,000 down payment assistance proposal aimed at first-generation buyers also failed. In the current Congress, the Bipartisan American Homeownership Opportunity Act of 2025 proposes a credit of up to $50,000 subject to income limits.² None of these have become law. Anything you read about a $15,000 or $25,000 credit is describing a proposal, not a benefit you can currently claim.

Who Counts as a First-Time Buyer

You do not have to have never owned a home. Under most federal programs, you qualify if neither you nor your spouse owned a principal residence during the three years before the purchase date.³ Owned a home six years ago and rented since? You meet the standard.

Some programs make exceptions for displaced homemakers and single parents. If your prior ownership was jointly with a spouse during a marriage that has since ended in divorce, separation, or widowhood, that ownership may not count against you. Rules vary by program, so check each one individually.

The Mortgage Credit Certificate Program

The Mortgage Credit Certificate (MCC) is the main federal tax benefit currently available to first-time buyers. Your state or local housing finance agency issues the certificate, which converts a percentage of your annual mortgage interest into a direct tax credit rather than a deduction.⁴

Certificate credit rates run from 10 percent to 50 percent of the mortgage interest you pay each year. If your rate is above 20 percent, federal law caps the annual credit at $2,000. At rates of 20 percent or below, no dollar cap applies — the credit is simply the rate multiplied by your interest paid.⁴ Pay $12,000 in interest with a 20 percent certificate rate, and your credit is $2,400.

To qualify, you generally must fall within income limits and purchase price caps set by the issuing agency based on local median figures. The home has to be your principal residence for as long as you claim the credit. The credit is nonrefundable, so it can only reduce your federal tax to zero. If your credit exceeds your tax liability in a given year, you can carry the unused portion forward for up to three tax years.⁴

How the MCC Interacts With the Mortgage Interest Deduction

If you itemize on Schedule A, you must reduce your mortgage interest deduction by the amount of MCC credit you claim on Form 8396.⁵ You take a credit on part of your interest and a deduction on the rest, not both on the same dollars.

If you take the standard deduction, the MCC credit still works. Form 8396 is separate from Schedule A, so buyers whose itemized deductions do not exceed the standard deduction still benefit. That makes the MCC especially useful for buyers with modest deductions otherwise.

Claiming the Credit

You claim the mortgage interest credit on IRS Form 8396, attached to your Form 1040.⁶ You will need three things:

Your certificate number and credit rate, both on the MCC itself.
Total mortgage interest paid, as reported on Form 1098 from your lender.
Your Closing Disclosure to verify the purchase price, closing date, and property address.

The form walks through the calculation: enter your interest paid, multiply by the certificate rate, and apply the $2,000 cap if your rate is above 20 percent. It also tracks any carryforward from prior years automatically.⁵

Recapture Tax if You Sell Within Nine Years

Before accepting an MCC, know the recapture rule. If you sell or dispose of the home within nine years of getting the MCC-subsidized mortgage, your income has grown significantly since purchase, and you realize a gain on the sale, the IRS may require you to repay part of the benefit.⁷

All three conditions must be present. “Significantly more income” means your income exceeds the original qualifying limit for your household size, compounded by 5 percent each year since purchase. Hold the home past nine full years and recapture does not apply at all.

Some situations are exempt even within the nine-year window. A transfer to a spouse or former spouse in divorce does not trigger recapture. If the home is destroyed by fire, storm, or flood and you rebuild on the same site within two years, recapture generally does not apply. Refinancing without selling does not trigger it by itself, though a later sale within the window still could.⁷ When recapture does apply, you calculate and report it on IRS Form 8828 with your return for the year of sale.

Penalty-Free IRA Withdrawals for a First Home

If you have a traditional IRA, you can withdraw up to $10,000 over your lifetime without paying the usual 10 percent early withdrawal penalty, as long as the funds go toward buying, building, or rebuilding a principal residence.⁸ The limit is per person, so two spouses with separate IRAs can each withdraw up to $10,000 for the same purchase.

Several details matter here:

The ownership test uses a two-year lookback, not the three-year standard elsewhere. You qualify if neither you nor your spouse owned a principal residence in the two years before acquisition.⁸
You have 120 days from receiving the distribution to use it on qualified acquisition costs.
The home can be for your spouse, child, grandchild, or parent, not just yourself.
Waiving the penalty does not waive income tax. A traditional IRA distribution is still taxed as ordinary income. Qualified Roth IRA distributions come out tax-free.
The exception applies only to IRAs, not to 401(k)s or other employer-sponsored plans.⁹

State and Local Programs

Most states run their own first-time buyer assistance through state housing finance agencies. These programs take several forms. Deferred-payment second loans cover down payment or closing costs with no monthly payments until you sell, refinance, or pay off your first mortgage. Forgivable loans are erased entirely if you stay in the home for a set period, often five to ten years. Some agencies offer below-market first mortgage rates, and some offer outright grants that do not need to be repaid.

Eligibility, dollar amounts, and deadlines differ by state and sometimes by county. Some programs target specific groups such as teachers, first responders, veterans, or buyers in designated development areas. Others are open to any income-qualifying first-time buyer. Your state housing finance agency’s website is the place to start, and in nearly every case you must apply and be approved before closing. Retroactive applications are generally not accepted.

1
U.S. Department of the Treasury. Thirty Days and Counting: Treasury Reminds Potential Homebuyers of Deadline on Recovery Act Expanded Tax Credit
2
Congress.gov. H.R. 3475 – Bipartisan American Homeownership Opportunity Act of 2025
3
Office of the Law Revision Counsel. 26 U.S. Code 36 – First-Time Homebuyer Credit
4
Office of the Law Revision Counsel. 26 U.S.C. 25 – Interest on Certain Home Mortgages
5
Internal Revenue Service. Form 8396 – Mortgage Interest Credit
6
Internal Revenue Service. About Form 8396, Mortgage Interest Credit
7
Internal Revenue Service. Instructions for Form 8828 – Recapture of Federal Mortgage Subsidy
8
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions