A Proposed Tax Credit for California First-Time Home Buyers in 2021

Key highlights from this report:

• President Joe Biden is proposing a tax credit for first-time home buyers in 2021.
• It would be an “advanceable” credit, meaning buyers wouldn’t have to wait for it.
• His proposal would offer a tax break of up to $15,000, if approved in its current form.
• It would ease some of the upfront costs of buying a house, like the down payment.
• We expect to hear more about it in the coming weeks and will keep you posted.

Last year, Joe Biden rolled out his vision for housing in America. Among other things, his plan included a proposed tax credit for first-time home buyers in California and nationwide. We don’t yet know all of the details yet, but we can make an educated guess based on (A) previous tax credits and (B) the language in his proposal.

Here’s what you should know about a possible 2021 tax credit for first-time home buyers in California.

A 2021 Tax Credit for First-Time Buyers in California?

The Biden-Harris administration has proposed a broad range of housing-related proposals, many of which focus on affordability issues. Among other things, this plan includes a proposed tax credit for first-time home buyers in California and elsewhere across the nation.

Here’s a relevant excerpt from their proposal:

“Help families buy their first homes and build wealth by creating a new refundable, advanceable tax credit of up to $15,000. Biden’s new First Down Payment Tax Credit will help families offset the costs of homebuying and help millions of families lay down roots for the first time. Building off of a temporary tax credit expanded as part of the Recovery Act, this tax credit will be permanent and advanceable, meaning that homebuyers receive the tax credit when they make the purchase instead of waiting to receive the assistance when they file taxes the following year.”

That’s all we have to go on at this point, in terms of details. And it’s not much. But we can make some educated guesses as to what this proposal will look like, based on the language above and similar credits from the past.

Revisiting the Recovery Act of 2009

The quote above says that a 2021 tax credit for first-time home buyers would build off the temporary tax credit that was part of the “Recovery Act.”

This is a reference to the American Recovery and Reinvestment Act of 2009, an economic stimulus package that Barack Obama signed into law back in 2009. That act was intended to repair some of the economic damage caused by the Great Recession.

Among other things, the Recovery Act gave first-time home buyers in California and nationwide a tax credit of up to $8,000. And with a few exceptions, it did not have to be repaid. So it almost worked like a grant, rather than a loan. Home buyers were able to claim it when filing their federal income taxes, using a special form designed for that purpose.

Definition of a First-Time Home Buyer

The quote above, which summarizes Biden’s tax credit proposal, uses the word “first” three times within one paragraph. It says it’s designed to “help families buy their first homes.” But that term can be misleading.

The proposal also says that the 2021 home buyer tax credit would be based on the 2009 framework, which had a fairly loose definition of a “first-time” buyer.

Here’s what the IRS page said about the 2009 credit:

“For homes purchased in 2009 prior to November 7, the credit is for a maximum of $8,000 and, with some exceptions, does not have to be repaid, but it’s only for new home owners who have not owned a home in the prior three years.”

So, if a 2021 tax credit for first-time buyers will “build off” the previous one offered under the Recovery Act, it might have many of those same features. If so, the definition of a “first-time home buyer” might be equally broad. It might be open to anyone who hasn’t owned a house within the last three years, as stated above.

Some in Congress want to see an even broader tax credit, one that would apply to all home buyers regardless of whether (or when) they’ve purchased properties in the past. The argument there is that a broader stimulus measure would have far-reaching effects across the economy.

What Exactly Does ‘Advanceable’ Mean?

The proposal also says the first-time home buyer tax credit would be “advanceable.” In tax lingo, this means that home buyers would be able to claim the credit immediately (when purchasing a property), instead of waiting until they file their annual returns.

With an advanceable tax credit, California home buyers could potentially use the credit amount (up to $15,000) as a kind of down payment assistance. This would make it different from the 2009 credit, which had to be claimed when filing taxes. That would be a huge benefit for buyers, if it works out that way.

But again, all of this is still in the proposal stage. A first-time buyer tax break would have to get majority approval in both the House and Senate. So there is a ways to go.

Given the current economic challenges the country is facing, it seems likely that Congress will issue a home buyer tax credit in some form. But there’s also a good chance the amount could be negotiated downward, or that additional restrictions might be introduced.

We will keep a close eye on this one and post updates as they come in!