California offers incentives to first-time homebuyersin the state, including various tax credits. The Mortgage Credit Certificate (MCC) program is one of these tax credit incentives. It converts a portion of your mortgage payments into a federal income tax credit, but you have to qualify.
Here's how the MCC works and how to find out whether you're eligible for it.
Key Takeaways
- The Mortgage Credit Certificate (MCC) program allows qualified homebuyers to claim a tax credit on their federal income tax returns equal to 10% to 50% of the interest they paid.
- The MCC program is run by individual counties in California. Credits of about 20% are common.
- You can claim the balance of your interest as a tax deduction on your federal return if you itemize. But you can't also claim a deduction for the amount of interest that was subject to the tax credit.
- Income limits apply. Homebuyers must live in the residence. There can be caps as to the cost of the home as well.
What Is a Tax Credit?
A tax credit is a dollar amount that you can subtract from your tax bill when you complete your tax return. Credits are considered better than tax deductions. Both reduce your tax liability, but a credit can be used to directly subtract any tax you owe, or it can increase your tax refund if you don't owe anything. With a refundable credit, the Internal Revenue Service (IRS) will send you $100 if you don't owe any taxes, and you claim a refundable tax credit worth $100.
Note
Some tax credits aren't refundable. They can only erase any tax you owe the IRS. But that's still a dollar-for-dollar tax break.
The IRS won't be sending you any money for a tax deduction. Tax deductions can only reduce your taxable income, so you're taxed on less. But this will indirectly reduce your total tax bill.
The MCC tax credit program allows homeowners to subtract a portion of the mortgage interest they pay 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 mortgage interest. But the program is administered locally, so the details will largely depend on where you live.
The program is run by counties in California. 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 if you itemize on your tax return. But there's no double-dipping. You can't also take a deduction for that 20% you received as a tax credit.
Note
The IRS limits the federal home mortgage interest deduction to interest paid on up to $750,000 of mortgage debt. This drops to $375,000 if you're married and file a separate return.
Who Qualifies for the Homebuyer Credit?
Three factors determine your eligibility for the MCC program:
- You must be a first-time homebuyer who's taking out a new mortgage.
- There are eligibility caps on how much you earn, as well on how much the house can cost. The specifics of these caps can vary from county to county.
- You must live in the home you're buying. It must be your residence, not a rental property.
California's income limit is no more than 115% of the area median income. The cost limit is no more than 90% of the average purchase price in the area over last year. The home doesn't have to be a single-family detached house. It can be a townhome or a condo.
Note
The income and purchase price caps increase if you're 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 here, 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. 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 if you call:
- Bank statements
- Previous years' tax returns
- Pay stubs or records
- Employment history
Potential Tax Credit Recapture
The IRS retains the right to "recapture" or take back some or all of the tax credit if 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.
Frequently Asked Questions (FAQs)
How does an MCC make home buying more affordable?
The credit is the equivalent of cash off your federal tax bill. This leaves you with more income to make your monthly mortgage payments.
What is a first-time homebuyer?
Being a first-time homebuyer doesn't mean that you've never owned a home before. You just can't have owned one in the last three years.
FAQs
The credit is also subject to income limits, which vary depending on your location and family size. In California, first-time homebuyers may also be eligible for a tax credit of up to $10,000. To qualify for this credit, you must purchase a home in California and meet certain income and purchase price limits.
What are the tax credits for home owners in California? ›
The Homeowners' Exemption, which allows a $7,000 exemption from property taxation, is authorized by Article XIII, section 3, subdivision (k) of the California Constitution and implemented by Revenue and Taxation Code section 218. The exemption reduces a dwelling's assessed value on a qualified residence.
What does the IRS consider a first time home buyer? ›
A first- time homebuyer is an individual who, with his or her spouse if married, has not owned any other principal residence for three years prior to the date of purchase of the new principal residence for which the credit is being claimed.
How do tax credits work? ›
A credit is an amount you subtract from the tax you owe. This can lower your tax payment or increase your refund. Some credits are refundable — they can give you money back even if you don't owe any tax. To claim credits, answer questions in your tax filing software.
Do you get a big tax return when you buy a house? ›
The Mortgage Credit Certificate (MCC) program allows qualified homebuyers to claim a tax credit on their federal income tax returns equal to 10% to 50% of the interest they paid. The MCC program is run by individual counties in California. Credits of about 20% are common.
How much money do you get back on taxes for mortgage interest? ›
How much interest can I write off? You can deduct the interest you paid on the first $750,000 of your mortgage during the relevant tax year. For married couples filing separately, that limit is $375,000, according to the Internal Revenue Service.
Who is eligible for the California homeowners exemption? ›
(Art XIII Sec 3 of the CA Constitution, Rev & Tax 218). How do I qualify for the Homeowners' Exemption? To obtain the exemption for a property, you must be its owner or co-owner (or a purchaser named in a contract of sale), and you must live in the property as your principal place of residence.
How does buying a house affect taxes? ›
You can deduct some of the ongoing payments you make for owning your home, including: Real estate taxes actually paid to the taxing authority. Qualifying home mortgage interest. Mortgage insurance premiums.
What is the home Efficiency tax credit in California? ›
If you make qualified energy-efficient improvements to your home after Jan. 1, 2023, you may qualify for a tax credit up to $3,200. You can claim the credit for improvements made through 2032. For improvements installed in 2022 or earlier: Use previous versions of Form 5695.
When did first time homebuyer credit end? ›
This credit was created in response to the 2008 recession as part of the Housing and Economic Recovery Act (HERA). The credit, worth as much as $8,000, is no longer available on homes purchased after 2010, though some states have tax credits and deductions to offset the cost of buying a house with a mortgage.
This payment may include several costs of owning a home. The only costs the homeowner can deduct are: state and local real estate taxes, subject to the $10,000 limit. home mortgage interest, within the allowed limits.
What is the first time homebuyer credit repayment? ›
The credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments that began in the 2010 income tax year. For example, if you bought a home in 2008 and claimed the maximum credit of $7,500, the repayment amount is $500 per year.
Do tax credits give you a refund? ›
Tax credits are amounts you subtract from your bottom-line tax due when you file your tax return. Most tax credits can reduce your tax only until it reaches $0. Refundable credits go beyond that to give you any remaining credit as a refund. That's why it's best to file taxes even if you don't have to.
How are people getting 30k back on taxes? ›
The Department of Community Services and Development encourages Californians earning under $30,000 a year to file their taxes to claim the California Earned Income Tax Credit (CalEITC), a cash-back tax credit, and receive a larger tax refund.
How much can you claim in tax credits? ›
California Qualifying Chart
| Number of Qualifying Children | State EITC Income Limits | State EITC Maximum Credits |
|---|
| None | $15,008 | $223 |
| 1 | $22,322 | $1,495 |
| 2 | $22,309 | $2,467 |
| 3 or more | $22,302 | $2,775 |
The California Constitution provides for the exemption of $7,000 (maximum) in assessed value from the property tax assessment of any property owned and occupied as the owner's principal place of residence. The exemption reduces the annual property tax bill for a qualified homeowner.
Are California property taxes deductible? ›
In conclusion, property taxes are tax-deductible in California for both state and federal taxes, but there are some limitations, especially on the federal level due to the $10,000 cap. If you have any other questions about property taxes or deductions, please consult with your tax advisor or your CPA.
Can you write off your mortgage in California? ›
In California, the mortgage interest deduction limit is tied to the federal limit imposed by the Tax Cuts and Jobs Act (TCJA) enacted in 2017. Under the TCJA, homeowners can deduct mortgage interest on up to $750,000 of qualified residence loans ($375,000 for married individuals filing separately).
