California offers 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. If you qualify, it essentially converts a portion of your mortgage payments into tax credits.
Here's how the MCC works and how to find out whether you could qualify for it.
What Is a Tax Credit?
A tax credit is a dollar amount that you get to subtract from your tax bill when you file returns. Tax credits are usually considered more favorable than tax deductions. Both reduce your tax liability, but only a credit can be used to increase your tax refund. If you don't owe any taxes (i.e., if you have a tax liability of $0), and you have a tax credit for $100, for example, then the Internal Revenue Service (IRS) will pay you $100. If that credit were instead a deduction, your tax bill would remain at $0, and the IRS wouldn't send you any money.
The MCC tax credit program allows homeowners to subtract a portion of the mortgage interest they paid 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 interest, but the program is administered locally, so the details will largely depend on where you live. In California, the program is run by counties, but 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, too, if you itemize your tax return. There's no double-dipping—you can't also take a deduction for the 20% you received back as a tax credit.
The IRS limits the federal home mortgage interest deduction to interest paid on up to $750,000 of mortgage debt—$375,000 if you're married and filing a separate return.
Who Qualifies for the Homebuyer Credit?
Three factors determine someone's eligibility for the MCC program. First, they must be first-time homebuyers getting a new mortgage. Secondly, there are eligibility caps on how much participants can earn and how much the house can cost. (The specifics of these caps vary from county to county.) Third, the people buying the home through the program must actually live in it.
As an example, let's consider Los Angeles County. There, the income limit for you (and your spouse, if you're married) is $135,120. If you live in a household with three income earners, then the limit increases to $157,640. The maximum purchase price for the home is $679,847. If you earn more than that, or if the home costs more than that, then you won't qualify for the program.
These income and purchase price caps increase if you are 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 in these areas—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, and 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 when you call):
- Bank statements
- Previous years' tax returns
- Pay stubs or records
- Employment history
The Internal Revenue Service retains the right to "recapture," or effectively take back, some or all of the tax credit. This only happens when 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.
CalHFA recommends that you consult with a tax professional because the credit can have a significant impact on your tax return. State laws change frequently, and 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.