New Bill Offers $50,000 Tax Credit for First-Time Homebuyers, But With a 5-Year Catch

The Bipartisan American Homeownership Opportunity Act of 2025 is a massive swing at the housing affordability crisis, primarily by offering two big tax incentives. For the busy person trying to get off the renter treadmill, the main event is a new federal tax credit of up to $50,000 for first-time homebuyers. But like any good deal, you need to read the fine print, because this credit comes with a few strings attached.

The Down Payment Lifeline (and the Income Snag)

Section 2 of the bill creates the First-Time Homebuyer Credit, which essentially equals the amount of your down payment, capped at a generous $50,000. Here’s the big win: You don’t have to wait for your tax return. You can opt to have the money transferred directly into a special escrow account for your purchase, acting like an instant down payment booster. This is huge for the 30-something trying to save up the 20% needed to avoid PMI. However, if your prior year’s income was too high, the credit starts to shrink. For joint filers, the phase-out starts at a Modified Adjusted Gross Income (MAGI) of $300,000, and for single filers, it begins at $150,000. If you fall outside those brackets, you’re still in the game, but the benefit won't be the full $50,000.

The Five-Year Recapture Rule: Don't Move Too Soon

This is the most critical detail for anyone thinking about taking the credit: If you sell the house or stop using it as your primary residence within five years of buying it, you have to pay the entire credit amount back to the IRS. Think of it as an interest-free loan that gets wiped clean after five years of residency. For someone who might need to relocate for a job, or whose family outgrows a starter home quickly, this recapture rule is a serious consideration. The only major exceptions are if you die, get divorced, or are ordered to military or Foreign Service duty. If you sell within the five years and immediately buy another primary residence, the clock doesn't reset—it keeps ticking from the date of your original purchase, which offers some flexibility.

A New Incentive for Starter Homes

Section 3 tackles the supply side by creating the Starter Home Construction Credit for builders. This is designed to get more entry-level homes built. Builders can claim a tax credit of 15% of their construction costs. If they sell that home to a qualified first-time homebuyer, that credit jumps to 30%. To qualify, the home must be small—no more than 1,200 square feet—and the selling price cannot exceed 80% of the area median home price. This provision is a direct incentive to construct smaller, more affordable units, which could be a game-changer in markets starved for inventory. The catch here is that the credit is limited by a state-level cap, meaning builders in high-demand areas might find the available credit dollars run out fast.

The Hidden Tax Bill: Basis Reduction

Whether you’re the homebuyer claiming the $50,000 credit or the builder claiming the construction credit, there’s a quiet provision in both sections that affects your future tax liability: Basis Reduction. When you claim the credit, you must reduce the tax basis (the starting value for tax purposes) of the property by the exact amount of the credit you received. For example, if you buy a house for $300,000 and get a $50,000 credit, your tax basis effectively drops to $250,000. Why does this matter? When you eventually sell the home, the lower your basis, the higher your taxable profit (capital gain) will be. So, while you get a huge upfront benefit, you might pay a little more in capital gains tax down the road.