Soaring home prices and mortgage interest rates have made it far more difficult to buy a house, but most South Carolina residents overlook a valuable tax benefit that could help.
The mortgage credit certificate opens the door to a federal income tax credit that can be worth $2,000 every year of home ownership. It’s an unusual tax credit because you can only claim it if you obtain an MCC before closing on a home purchase.
One might think the prospect of saving $2,000 yearly would result in a stampede for MCCs, but last year just 69 were issued in South Carolina.
There are home price and income limits, because it’s considered a type of federally subsidized financing, but both are generous. And both limits just increased in South Carolina, which makes the MCC available to more potential home buyers.
- The home price limit was $350,000. Now, it’s $395,000.
- The income limit in most South Carolina counties was $94,080. Now, it’s $99,480, or $116,060 for a household of three or more.
In 18 counties income limits vary but the home price limit is the same. The highest county income limits for a household of one or two are in Beaufort ($133,560), Berkeley ($121,500) and Dorchester ($121,560), while the lowest income cap is $82,900 in Aiken, Anderson, Greenwood, Oconee, and Spartanburg.
So, if you’re buying a home that will be your primary residence and you meet the price and income rules, you could get a mortgage credit certificate. Over a decade of home ownership, that could be worth $20,000.
One obtains an MCC by working with a participating lender, and paying up to $1,000 in fees — $500 for the MCC and up to $500 in lender charges. Again, this must be done before completing the purchase of the home.
After that, you get a tax credit of up to $2,000 each year. The amount is based on 30 percent of the mortgage interest paid, so most people would get the full $2,000 year after year.
Remember that a tax credit is a dollar-for-dollar reduction in federal income tax owed. It’s much more valuable than a tax deduction, which reduces the amount of income that’s taxed.
While the mortgage credit certificate is a federal tax credit, it’s only available in participating states where a housing finance agency has agreed to administer them. In South Carolina, that’s SC Housing — the short name for the State Housing Finance & Development Authority — which started offering them in 2013.
SC Housing has more information, including participating lenders, at schousing.com or 803-896-2211. The email address is mortgage.production@schousing.com.
An MCC can not only save money every year, but can help a home buyer more easily qualify for a loan.
That’s because the $2,000 annual tax credit can literally increase the buyer’s monthly income, by $166. Taking the tax credit into account, a person could reduce the federal income tax withheld from their pay instead of waiting for a tax refund later.
There is one more rule to be aware of.
If you get an MCC and sell the home after less than nine years and your income has increased beyond the MCC income limits and you make a profit selling the house, then you’d have to give some money back to the government.
The amount would be the lesser of half the capital gain on the house or 6.25 percent of the original loan amount. Someone in that circumstance would still come out ahead but would have to repay some of the subsidy.
I wish South Carolina had offered mortgage credit certificates when I bought a house in 2004. That would have saved me $26,000 by the time I sold it.