The California Tax Credit for First-Time Homebuyers
What Is a Tax Credit?
A tax credit is significantly better than a tax deduction. A deduction only reduces your taxable income, but a 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 during the year directly from any federal taxes they owe to the Internal Revenue Service.
How Much Is the Homebuyer Credit?
The CalHFA Mortgage Credit Certificate program was available to homebuyers who closed mortgages between May 7, 2012, and Dec. 31, 2018. It was equal to 20% of the mortgage interest paid during the year. Some lenders were known to even work with you to include the credit as an offset to your monthly payment, or add it to your income for purposes of qualifying for the loan. It could be used with both government and conventional loans. However, it's no longer available.
You could roll any unused part of the credit forward for up to three years if the 20% is more than your total tax liability. And you could also use it every year as long as you remained liable for the mortgage.
You could still take a tax deduction for the remaining 80% interest you paid, too, if you itemized on your tax return, but there was no double-dipping. You couldn't also take a deduction for the 20% you received back as a tax credit.
The Internal Revenue Code limits the federal home mortgage interest deduction to interest on indebtedness of $750,000 or less as of 2018—$375,000 if you're married and filing a separate 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, and the property in California must be your principal place of residence. 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 meet certain requirements:
- The sales price must be less than the allowable sales price limit for the county in which it's located. The California Housing Finance Agency (CalHFA) publishes a list of 2018 prices online. The limits range from $271,164 in Butte County to $625,764 in Los Angeles County. These figures apply only to the MCC program.
- 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).
The credit applies to new mortgages only.
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
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 could lose your MCC eligibility. CalHFA also publishes a list of qualifying incomes for each California county effective 2018 and based on family size.
The Internal Revenue Service retains the right to "recapture" or effectively take back some or all of the tax credit if you sell your home within nine years of purchasing it and you earn significantly more at that time than you did when you purchased it and you realize a profit from the sale.
The maximum recapture tax is 50% of your gain or 6.25% of your original loan balance, whichever is less.
NOTE: 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.
The information contained in this article is not intended as tax advice and is not a substitute for tax advice.
California Housing Finance Agency. "Mortgage Credit Certificate (MCC) Tax Credit Program." Accessed July 21, 2020.