4 States Offering Unique Tax Breaks for New Homeowners
Written by
Jake Safane
Edited by
Gary Dudak
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Across the U.S., real estate prices continue to rise. The median sales price in the U.S. rose 5% over 2024 to reach $434,720, according to Redfin. Meanwhile, mortgage rates remain relatively high, even though the Fed has cut rates recently.
The good news, though, is that there are ways for new homeowners to get some relief. In addition to a wide range of federal tax breaks for homeowners — ranging from mortgage interest deductions to energy efficiency tax credits — certain state governments also offer their own tax breaks for homeowners.
If you’re deciding which state is best for your first house, check out the best and worst states for first-time homebuyers.
Texas
Some states offer what’s known as a homestead exemption, which essentially means you can reduce the taxable value of your home if that’s your primary residence. In Texas, for example, the homestead exemption enables you to reduce school district taxes by $100,000, according to Comptroller.Texas.gov.
That doesn’t mean you get a full $100,000 tax break, but instead you’re taxed on a lower amount — e.g., a $500,000 home would be taxed at $400,000. Still, that exemption can save you hundreds or even thousands of dollars per year.
Plus, homeowners age 65 and older or those who are disabled qualify for an additional $10,000 exemption.
North Carolina
Several states offer tax relief to first-time homebuyers via mortgage credit certificates (MCC), with one example being in North Carolina. There, new homebuyers who haven’t owned a home as their principal residence in the past three years — along with military veterans — can use an MCC to get up to $2,000 in federal tax credits via the North Carolina Housing Finance Agency.
The MCC works by providing this tax credit based on 30% of the interest paid on an existing home and 50% for a newly built home. Remember, a tax credit is a direct reduction in the amount owed, whereas a deduction reduces the taxable amount. So in states like North Carolina, you may be able to save up to $2,000 per year just through this tax relief program.
Maryland
Another unique way to save on taxes can be seen in Maryland, via first-time homebuyer savings accounts, according to MarylandHomeownership.com. These accounts enable those who haven’t owned a home in the past seven years to save money for a down payment in an eligible savings account, and in doing so, they can deduct up to $5,000 per year in contributions from their state taxes for 10 years.
So, that could leave you with $50,000 in a savings account after 10 years, and avoiding state taxes on that $50,000 can also save you thousands.
Colorado
Similar to Maryland, Colorado offers a state deduction for first-time homebuyer savings accounts, but the process is a little different.
Instead of deducting contributions, the interest earned from these accounts can be tax-free at the state level. Individual taxpayers can contribute up to $14,000 per year, or $28,000 if married filing jointly, and the total maximum contribution over the years is $50,000, according to the Colorado Office of the State Auditor. Any interest is then tax-free up until the account reaches $150,000 in value.
Don’t Just Look at Taxes
While these types of state tax relief programs do help homeowners save money, there are additional programs available in many areas that can also help, such as down payment assistance. Your local city or county might also offer relief alongside state or federal programs.
For example, the “Chicago Housing Authority (CHA) offers various programs, including down payment assistance of up to $20,000 that homebuyers can apply for,” said Cody Horvat, licensed real estate broker at The Scott Group, a division of Compass.
“The Illinois Housing Development Authority (IHDA) also offers deferred and forgivable loans to help with your down payment, usually with the stipulation that you stay in the home for a certain amount of time,” Horvat explained. “With forgivable loans, you must live in the home for a certain amount of time, usually around 10 years, and then the loan is forgiven.
“With deferred loans, you do not have to make any payments and the loan does not accrue interest. However, once you move or sell the home, you will have to pay back the amount originally borrowed.”
He added that these types of programs can help new homebuyers overcome one of the largest barriers to homeownership: saving for a down payment and closing costs. Make sure you’re aware of your options to maximize savings and perhaps afford a home sooner than you’d think.
“I always recommend working with a professional real estate agent and knowledgeable lender that can help you navigate all the options and determine what you qualify for based on your current housing situation and income,” said Horvat.
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