The MCC Tax Credit: What It Is and How to Qualify

The Mortgage Credit Certificate, or MCC, is a federal tax credit designed to make homeownership more affordable for lower-income individuals. It functions by reducing a homeowner’s annual federal income tax liability on a dollar-for-dollar basis, which effectively subsidizes a portion of their mortgage interest payments. By converting a portion of their mortgage interest into a direct tax credit, it increases their net spendable income. This program is not administered directly by the Internal Revenue Service (IRS); instead, the certificates are issued by state or local government housing finance agencies (HFAs).

Determining Your Eligibility

To qualify for a Mortgage Credit Certificate, a prospective homebuyer must meet several specific criteria established by the issuing HFA. The primary requirement is related to homeownership history. An applicant must be a first-time homebuyer, which the program defines as someone who has not had an ownership interest in a principal residence at any point during the previous three years.

Some exceptions to the first-time homebuyer rule exist. For instance, the requirement may be waived for qualified military veterans or for individuals purchasing a home in a federally designated “targeted area.” These targeted areas are census tracts identified as economically distressed and in need of encouragement for development.

Applicants must also meet financial limitations. A homebuyer’s total annual household income cannot exceed the limits set by the local HFA, which vary based on the property’s location and the number of people in the household. Similarly, the purchase price of the home must not be more than the maximum amount allowed for that specific area.

How to Obtain a Mortgage Credit Certificate

The first step for an eligible homebuyer is to find a participating mortgage lender. Not all banks or credit unions offer MCCs, so it is necessary to locate one that is approved by the state or local HFA to handle the application. Once connected with an approved lender, the homebuyer will work with them to formally apply for the certificate from the HFA, which is typically submitted at the same time as the mortgage loan application.

The certificate must be applied for and officially issued by the HFA before the mortgage loan closes. An MCC cannot be obtained retroactively after the home purchase is complete. Homebuyers should also be aware that HFAs charge a non-refundable fee for issuing the certificate, which can range from a few hundred to over a thousand dollars, depending on the agency.

Claiming the Credit on Your Annual Tax Return

After purchasing a home with an MCC, the homeowner can claim the tax credit each year when filing their federal income taxes. This is done using IRS Form 8396, Mortgage Interest Credit. This form must be completed and attached to the homeowner’s annual Form 1040 tax return.

The calculation of the credit is straightforward. The homeowner multiplies the total amount of mortgage interest paid for the year, found on Form 1098 from the lender, by the certificate credit rate. This rate, which is specified on the MCC, ranges from 10% to 50%. For example, if a homeowner paid $10,000 in mortgage interest and has a certificate with a 20% credit rate, their tax credit would be $2,000. The IRS caps the credit at $2,000 per year if the certificate rate is above 20%.

The portion of mortgage interest used to calculate the tax credit cannot be deducted again. In the example above, the homeowner would subtract the $2,000 credit amount from their total interest paid, leaving $8,000 that can still be claimed as an itemized deduction. If the calculated credit is larger than the homeowner’s total tax liability for the year, the unused portion of the credit can be carried forward to subsequent tax years for up to three years.

Understanding the Recapture Rule

Homeowners who benefit from a Mortgage Credit Certificate should be aware of a provision known as the recapture tax. This rule may require the homeowner to pay back all or a portion of the tax credit they received. The tax is calculated and reported on IRS Form 8828, Recapture of Federal Mortgage Subsidy.

For the recapture tax to apply, three specific conditions must all be met. First, the home must be sold within the first nine years of the purchase date. Second, the homeowner must realize a net profit from the sale of the home.

The final condition is that the homeowner’s income must have increased significantly since the time of purchase, rising above the federally adjusted income limit for the year of the sale. These income limits increase by 5% each year of the nine-year holding period. If any one of these three conditions is not met, the homeowner is not subject to the recapture tax.