Tax credit can benefit homebuyers

Eligible homebuyers in South Carolina can apply for a tax credit worth up to $2,000 a year.

If you plan to buy a home in South Carolina, you need to know — before you buy — about a tax credit that can put up to $2,000 back in your pocket every year you own a home.

You can get this tax credit only by obtaining a “mortgage credit certificate” when you are finalizing the purchase of a home. You can’t get one after the sale is completed. Once you’ve got the MCC, you get a federal tax credit every year you’re in the home and paying a mortgage.

The tax credit, following recent improvements unveiled in South Carolina this month, is now worth half the mortgage interest paid every year, up to $2,000.

The tax credit will increase your after-tax income, so it also boosts the income you can claim to qualify for a mortgage. The full tax credit essentially adds $166.67 to your monthly take-home pay.

You don’t have to have a low income to get an MCC, you don’t need to be a first-time homebuyer, and I wish the MCC had been available when I bought my home 11 years ago. It only became available in South Carolina in 2013 because, while it’s a federal tax credit, it requires state or local sponsor.

Here’s the stunning thing: To date, fewer than 200 people in the state have obtained an MCC. Countless thous---ands of homebuyers have missed out on this, probably because the word’s been slow to get out.

I’ll break down some of the rules and regulations, but here are the basics. If you meet guidelines that I’ll explain, you get an MCC by completing some paperwork with your participating mortgage lender while purchasing a home, and paying up to $700 in application and processing fees. That’s it.

This tax credit is far more valuable than the federal mortgage interest deduction. A deduction only reduces your taxable income. A tax credit is a dollar-for-dollar reduction in your tax bill, so a $2,000 tax credit is really worth $2,000.

Many homeowners don’t claim the mortgage interest deduction anyway, because their standard deduction is larger, but for those who do, interest not counted toward the MCC credit can be claimed.

So, what are the rules and who can apply?

There are limits on both the price of the home, and the income of the borrower, but they are high enough that the majority of people would qualify. Home prices and income limits vary by county, and are higher in the Charleston Metro area, but statewide the lowest home price limit is $275,000, and the lowest income limit is $55,500 for a single person.

In Berkeley, Charleston and Dorchester counties, the maximum home price for an MCC is $295,000. That’s $97,000 more than the median sale price of a single-family home in Dorchester County, and $87,000 more than in Berkeley, but $22,000 less than in Charleston County.

In Berkeley and Dorchester counties, a family of one or two can have an income of up to $75,480, while the income limit for a family of three is $88,060. Charleston County has lower limits — $62,900 and $72,335 — because it’s one of a dozen “nontargeted” counties where incomes are generally higher and incentives are lower.

In Berkeley, Dorchester, and most other counties, to qualify for an MCC you must not have an ownership interest in any other property at the time you close on your home. That makes you a “first-time homebuyer” even if it’s not your first.

In Charleston, Greenville, Lexington, Richland, Spartanburg and other so-called nontargeted counties, in order to get an MCC you must not have owned a home for three years prior. That rule is waived for veterans of active duty within the last 25 years.

In order to claim the tax credit, you must have federal income tax liability. The tax credit will reduce the tax you owe, but if the tax credit exceeds the amount you owe, you won’t get a check for the difference.

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You can find the full list of counties, income and home price limits, and other details online, at this address: www.schousing.com/library/Marketing/HB/MCCPG.pdf.

To find a participating lender, go to this site: www.schousing.com/First-Time_Home_Buyers/Find_a_Lending_Partner.

When South Carolina first made the MCC available — it’s a federal tax credit but requires a state or local partner — the tax credit was worth 30 percent of annual mortgage interest, up to $2,000. Now that it’s worth 50 percent, the next round of people who get MCC’s should be more likely to get the full, $2,000 tax credit.

Even at today’s low interest rates, about 4 percent on a 30-year mortgage loan, the interest on a loan of slightly more than $100,000 would be enough to get the maximum tax credit, at least in the first year.

With a fixed-rate, 30-year mortgage, most payments during the early years go toward interest, and the amount of interest paid declines each month, although the total payment stays the same.

Is there a catch? Not really, but there is a “recapture” provision tied to MCCs, because they are considered mortgage subsidies.

What that means is, you could have to repay some funds, but only if you sell the house at a profit after less than nine years and your income has increased to the point that you would no longer qualify for an MCC.

Even under that scenario, 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.