Mortgage Interest Credit – A Help for First-time Homebuyers
First-time homebuyers have an income tax credit potentially available to them that most probably do not know about, because frankly, it just hasn't received that much attention, at least that I can tell.
But the tax credit, which can be taken on their income tax return based on a portion of the mortgage interest paid, can provide valuable financial support when making what is probably the biggest purchase these buyers have ever made.
To receive the credit, the homebuyer must have been issued a "mortgage credit certificate", or MCC. In Arkansas, MCCs are issued by the Arkansas Development Finance Authority ("ADFA").
The amount of the credit will range from 20% to 50%, capped at $2,000 annually, of the yearly interest paid on a qualified mortgage. A great thing is, the credit is available for not just the first year of ownership, but every year you own the house!
Since the credit is targeted at first time low- to moderate-income homebuyers, as you might imagine there are a number of requirements that must be met to receive the MMC.
For example, the maximum price of the home for 2022 was $300,000. Also, for the 2022 Arkansas MCC program, the homebuyer's gross annual household income could not exceed certain limits based on family size. The maximum family incomes ranged from $64,920 to $89,880 for one- or two-person households, and from $75,740 to $104,860 for three or more persons in a household.
Gross annual income is defined as the total of all income, from whatever source, of everyone age 18 and older who will reside or who intends to reside in the home.
To qualify, homebuyers also had to meet the following eligibility requirements:
1. They must reasonably expect to occupy the residence as their principal residence within 60 days after it is financed by a participating lender. The MCC will expire on the date that the residence ceases to be the principal residence of the qualified homebuyer or earlier if it is revoked by ADFA because the homebuyer is not in compliance with requirements of the program.
2. The buyer must not have had an ownership interest in a principal residence within the preceding three years, with the exception of (i) qualified homebuyers purchasing homes in federally designated targeted areas and (ii) certain veterans, who are exempt from this requirement.
3. No more than 15% of the residence being purchased may be used in a trade or business use in accordance with the Internal Revenue code.
When filing the tax return, the credit is calculated and reported on Form 8396, Mortgage Interest Credit. It's possible after going through the calculation that someone may not be able to use all of the credit for that year. If that's the case, the unused amount can be carried forward to three future years for possible use then.
Another tax aspect of the credit is the possibility that some portion of it could have to be "recaptured" (basically repaid) in a future year. This could be the case if the buyer sells the home within the first nine years, realizes a profit on the sale, and has had a significant increase in household income. Since less than 3% of homeowners with an MCC incur a recapture under this rule, we'll just leave it at there and not get into the nitty gritty of the details.
One other very important detail to note – MCCs are issued on a first come, first serve basis, usually during the first quarter of the year, and can be snapped up quickly. For instance, there are no MCCs currently available under the 2022 program, but a potential 2023 program should not be not far away.
The mortgage interest credit is a great resource for those that qualify, easing the financial strain that can occur in buying a home. For more information about this and other programs designed to help Arkansans in their home ownership journey, you can go online to adfa.arkansas.gov and homeloans.arkansas.gov.