California offers quite a few incentives to first-time homebuyers in the state, including various tax credits. The Mortgage Credit Certificate (MCC) program is one of these tax credit incentives. It converts a portion of your mortgage payments into tax credits, but you have to qualify.
Here's how the MCC works and how to find out whether you're eligible for it.
- The Mortgage Credit Certificate (MCC) program allows qualified homebuyers to claim a tax credit on their federal income tax returns equal to 10% to 50% of the interest they paid.
- The MCC program is run by individual counties in California. Credits of about 20% are common.
- You can claim the balance of your interest as a tax deduction on your federal return if you itemize. But you can't also claim a deduction for the amount of interest that was subject to the tax credit.
- Income limits apply. Homebuyers must live in the residence. There can be caps as to the cost of the home as well.
What Is a Tax Credit?
A tax credit is a dollar amount that you can subtract from your tax bill when you complete your tax return. Credits are considered better than tax deductions. Both reduce your tax liability, but a credit can be used to directly subtract any tax you owe, or it can increase your tax refund if you don't owe anything. The Internal Revenue Service (IRS) will send you $100 if you don't owe any taxes and you claim a refundable tax credit worth $100.
Some tax credits aren't refundable. They can only erase any tax you owe the IRS. But that's still a dollar-for-dollar tax break.
The IRS won't be sending you any money for a tax deduction. Tax deductions can only reduce your income, so you're taxed on less. But this can indirectly reduce your tax bill.
The MCC tax credit program allows homeowners to subtract a portion of the mortgage interest they pay during the year directly from any federal taxes they owe to the IRS.
How Much Is the Homebuyer Credit?
The Mortgage Credit Certificate program is a national program that allows participants to deduct between 10% and 50% of mortgage interest. But the program is administered locally, so the details will largely depend on where you live.
The program is run by counties in California. The state housing authority has allowed participants to deduct up to 20% of their interest payments from their federal income tax liability.
You can still take a tax deduction for the remaining 80% interest you paid if you itemize on your tax return. But there's no double-dipping. You can't also take a deduction for that 20% you received as a tax credit.
The IRS limits the federal home mortgage interest deduction to interest paid on up to $750,000 of mortgage debt. This drops to $375,000 if you're married and file a separate return.
Who Qualifies for the Homebuyer Credit?
Three factors determine your eligibility for the MCC program.
First, you must be a first-time homebuyer who's taking out a new mortgage. Second, there are eligibility caps on how much you earn, as well on how much the house can cost. The specifics of these caps can vary from county to county. Third, you must live in the home you're buying. It must be your residence, not a rental property.
California's income limit is no more than 115% of the area median income. The cost limit is no more than 90% of the average purchase price in the area over last year. The home doesn't have to be a single-family detached house. It can be a townhome or a condo.
The income and purchase price caps increase if you're buying a home in a federally designated "target area." These are areas that have been targeted by the government to incentivize investment, so some regulations are relaxed here, including MCC program income and price caps.
How to Apply
CalHFA suggests contacting an MCC-participating loan officer for assistance in claiming the tax credit. These loan officers have been trained and approved by CalHFA. They can walk you through the homebuying process using the tax credit to your best possible advantage.
Take the following records with you when you're meeting with the loan officer for the first time, or have them at your fingertips if you call:
- Bank statements
- Previous years' tax returns
- Pay stubs or records
- Employment history
The IRS retains the right to "recapture" or take back some or all of the tax credit if all three of the following conditions are met:
- The borrower sells the home within nine years.
- The borrower earns significantly more income than when they bought the home.
- The borrower has a financial gain from the sale of the home.
The maximum recapture tax is 50% of your gain or 6.25% of your original loan balance, whichever is less.
The Bottom Line
CalHFA recommends that you consult with a tax professional before moving forward with a mortgage credit because the credit can have a big impact on your tax return. State laws change frequently. The above information may not reflect recent changes. Please consult with a California tax professional or CalHFA for the most up-to-date advice and information regarding this credit.
Frequently Asked Questions (FAQs)
How does an MCC make home buying more affordable?
The credit is the equivalent of cash off your federal tax bill. This leaves you with more income to make your monthly mortgage payments.
What is a first-time homebuyer?
Being a first-time homebuyer doesn't mean that you've never owned a home before. You just can't have owned one in the last three years.