Potential homebuyers in South Carolina should be sure to learn about a substantial tax credit that wasn’t available in this state prior to 2013.
The mechanics of it are a little complicated, but the bottom line is that if you obtain an S.C. Mortgage Tax Credit Certificate when you buy a home, you’ll be able to get a federal tax credit of up to $2,000 every year you own the home.
It’s important to remember that a tax credit is far more valuable than a deduction, because a credit reduces the tax you owe, dollar-for-dollar, while a deduction reduces the income that is taxed. So, if your top tax rate is 15 percent, a $2,000 deduction is worth $300, but a $2,000 credit is worth $2,000.
Who can get one of these certificates known as MCCs? Anyone whose income is not too high and qualifies as a first-time homebuyer. But that doesn’t mean you really have to be a first-time homebuyer. And you don’t have to have a low income.
In most South Carolina counties, including Berkeley and Dorchester, being a first-time buyer simply means that you don’t own a home on the day you close the loan for the home you are buying. In others, including Charleston, the requirement means you can’t have owned a home during the past three years.
There are income limits, and home price limits, to qualify for a certificate, but the majority of people would qualify.
In Berkeley and Dorchester counties, a couple (or single buyer) could earn up to $73,560, and buy a home costing up to $255,000. A family of three could have income up to $85,820.
In Charleston County, the income limit is $61,300 for one or two, and $70,495 for three or more. The home price limit is also $255,000.
So, how do you get one of these certificates?
You have to work with a participating lender (the S.C. Housing and Finance Authority has a list) and pay a fee when you close on the mortgage loan of about $700, which covers the costs of administration and processing by the state and the participating bank. In some cases, the seller of the home might pay the fees as an incentive.
Mortgages must be 30-year loans to qualify.
After you get the certificate, each year you’ll be allowed to claim a federal tax credit for 30 percent of the mortgage interest you paid the previous year, up to $2,000.
For example, let’s say someone borrows $150,000 for 30 years at 4.25 percent interest. They would pay $8,855 a year on the mortgage, with most of it going toward interest in the early years. Interest during the first year would be $6,299, which would result in a $1,890 tax credit.
Each following year, as the interest portion of the loan shrinks, the tax credit would be reduced as well.
The credit can reduce the tax you owe to zero, and can be carried forward up to three years if there’s any credit left over.
Also, the tax credit can allow people to reduce their paycheck tax withholding amount (because they’re going to owe less tax), thereby increasing their monthly take-home pay. So, the day after closing a loan with an MCC, you could walk into work and adjust your tax witholding.
Homebuilders love this program, because when someone’s take-home pay increases, it makes them more able to qualify for a loan and buy a house. I would caution, however, that if the income from the tax credit is necessary to qualify for a mortgage, then the borrower may be overextending himself.
In addition to claiming the tax credit, people with certificates can deduct the remainder of their mortgage interest, if they itemize federal deductions. Many people with modestly priced homes, at today’s low interest rates, don’t pay enough mortgage interest to itemize.
The MCC is a federal tax provision but South Carolina had to create a mechanism for the program at the state level, which is why it wasn’t available until this year.
So, is there a catch? There could be, depending on your circumstances.
The tax credit is considered a federal mortgage subsidy. If someone with a certificate sells their home after less than nine years, at a profit, and their income has increased beyond the guidelines to qualify for the program, they could owe “recapture” money to the federal government.
There’s a complicated formula for figuring out the recapture amount, based on income, capital gains and the years the home was occupied. The most a borrower could potentially have to pay back is either half the capital gain on the home sale, or 6.25 percent of the subsidized loan amount, whichever is less.
If you stay in the house at least nine years, or still meet the income guidelines when you sell in less than nine years, there’s no recapture cost.