We are now able to offer the MCC (Mortgage Credit Certificate) Tax Credit Program – which is available for eligible first time home buyers and home buyers who have not owned a home as their principal residence in the past three years. I am an especially big fan of this program – because I took advantage of it myself when I bought my first home.
The maximum purchase price for this program in 2018 is $250,000, and there is a one time fee of $475 to NCHFA which is paid when your loan closes – and then you can save up to $2,000 a year on your IRS 1040 Federal Tax Return, for every year you live in your home.
Here is how the MCC Tax Credit – which you take on your IRS 1040 – is determined:
- If you buy an existing home, your MCC allows you to claim a federal tax credit for 30% of the interest you pay per year – up to a maximum of $2,000 per year – for every year you live in your home. The remaining 70% of the interest you pay is still available as a tax deduction for mortgage interest paid.
- If you purchase a newly built home (new construction), you can claim a federal tax credit for 50% of the interest you pay – also capped at a maximum of $2000 per year – for every year you live in the home. The remaining 50% of the interest you pay is still available as a tax deduction for mortgage interest paid.
In order to receive a Mortgage Credit Certificate when you close your purchase mortgage, we submit your MCC application for approval from the NC Housing Finance Agency as we process your loan.
What are the requirements:
a) You must be a First Time Home Buyer, a military veteran, or buy a home in a targeted census tract.
b) You must be a permanent legal resident of the United States.
c) You must occupy the home as your primary residence within 60 days of closing.
e) You must provide income documentation for all income earners in the home for the previous 3 years.
d) Household Income – not just borrower income – must be within the county specific income limits.
See chart below for income limits in our local triangle counties:
|MCC Household Income Limits||1 Person||2 Persons||3+ Persons|
Here’s an example of how this tax credit works. On a $180,000 mortgage with an interest rate of 4.5%, you might pay $8040 in interest the first year. 30% of $8040 is $2412, which exceeds the limit of $2000, so you would be limited to a tax credit of $2000 for year. Remember that you can still claim a mortgage interest deduction for the remaining 70% of the mortgage interest you paid. So in this example, you’d have a tax credit of $2000 and a tax deduction of $6040.
If you do receive an MCC, your Federal taxes will be lower than normal. Once you calculate the annual tax credit you will be able to take, you can revise your payroll withholdings with your W-4 form, and reduce the amount of federal taxes your employer withholds from your regular paychecks. This is allowed because you are not required to have more taxes withheld than you will be required to pay. In the example above, if you qualified for the maximum $2000, you could have your monthly federal payroll tax witholdings reduced by $2000/12 = $167. That means you could take home an additional $167 per month, rather than wait for the $2000 tax credit when you filed your taxes the following April 15th.
Here is a link to the IRS form you need to accompany your 2017 IRS 1040:
What you should know about recapture
The MCC program targets buyers with low and moderate incomes. You should know that there is a federal tax recapture provision for borrowers who meet these three criteria:
- Sell the home within nine years, and
- Realize a profit when they sell, and
- Have a significant gain in household income – specifically this gain must be more than 5% yearly above the income limits in effect for each year the home is owned.
All three criteria must be met for a recapture tax to be a possibility. This recapture applies to a limited number of homes
For the limited number of homeowners who have to pay recapture, the tax guidelines are structured to help limit the impact. The maximum amount of recapture is 6.25% of the original loan amount or 50% of the gain from the sale, whichever is less. And gain from the home’s sale is calculated after deducting future real estate agent’s commissions, legal fees and closing costs.