California Tax Credits for First-Time Homebuyers
Beginning in 2010, California has offered first-time homebuyers various tax credits. The Mortgage Credit Certificate (MCC) program covers some homes purchased in 2015 and later.
What's a Tax Credit?
A tax credit is significantly better than a tax deduction. A deduction only reduces your taxable income, but a tax credit reduces your tax bill dollar for dollar. The MCC tax credit program allows homeowners to subtract a portion of the mortgage interest they paid directly from any federal taxes they owe.
How Much Is the Homebuyer Credit?
The MCC tax credit is equal to 20 percent of the mortgage interest paid during the year. Some lenders will even work with you to include the credit as an offset to your monthly payment, or they will add it to your income for purposes of qualifying for the loan. You can still take a tax deduction for the remaining 80 percent interest you paid if you itemize on your tax return.
Who Qualifies for the Homebuyer Credit?
You, or you and your spouse if you're married, must be U.S. citizens, permanent residents, or qualified aliens. You must be first-time homebuyers unless the home you're buying is in a federally designated targeted area or you're a veteran qualifying under the Heroes Earning Assistance and Relief Tax Act (the HEART Act) of 2008. You must live in the property you're purchasing for the entire duration of the loan and must move in within 60 days of closing.
Your home must also meet certain requirements:
- The sales price must be less than the allowable sales price limit for the county in which it's located.
- The property can include no more than five acres.
- The home must be a detached single-family residence, unless it is a condominium or an attached unit in a planned unit development.
- Your home must meet requirements set by your lender, your insurance company, and the California Housing Finance Agency (CalHFA).
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 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
You must still meet all the traditional income and credit requirements involved with qualifying for a mortgage. However, your income cannot exceed a maximum limit for the county in which you're purchasing or you may lose your MCC eligibility.
CalHFA recommends that you also consult with a tax professional because the credit can have a significant impact on your tax return.
NOTE: 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. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.