How to Eliminate Federal Income Taxes For 7 years and Build $70K in Wealth For a Moderate Income First Time Home Buyer Family.

It has been widely reported that federal income tax changes will likely result in more filers using the standard deduction. 

For moderate income first time homebuyers who no longer will benefit from itemization there is still a way they can reduce the net cost of home loan interest payments: the Mortgage Credit Certificate program.[Note: For "targeted" areas designated by state and local housing finance agencies, the first time homebuyer requirement is waived. In Oregon there are more than 50 targeted areas, including 13 entire counties in rural areas ].

Consider a family of four with income of $75,000. If they purchase a home with a 4.5% interest rate mortgage of $275,000, (With 5% down that would be a $289,474 sales price) their first year interest will be $12,284. 

With a mortgage credit certificate at 20% they would reduce their federal tax liability by $2,457 in the first year, AND they can continue to reduce their federal tax liability throughout the term of the mortgage. (Over 30 years the total federal tax savings from the MCC could be as high as $45,234).

With the standard deduction and child credits for two children the federal tax liability for this family in year one would be only $1,739 under the new tax law.  With the $2,457 first year MCC piggy backed on top of the standard deduction they will pay ZERO federal income tax AND they can carry forward the unused 1st year mortgage credit certificate value of $718 for three years to use on future tax returns. 

Even with an increase in federal income tax liability at 5% a year, I project that the family would have ZERO federal income tax liability through year 7 of the mortgage. This would mean an additional $14,159 in tax savings/income for the family over those 7 years. 

Wealth Accumulation/Federal Income Tax Savings After 7 Years: $70,718.

• The principal on a $275,000 4.5% rate mortgage would have been reduced by $35,678. 
• IF annual home appreciation on a home with a 5% down payment was a very modest 1% annually, the homebuyer would have added $20,881 in equity. 
• Combined the family would have added wealth of $56,559. 
• Adding in the federal income tax avoided the family would have added $70,718 in income and wealth because of the MCC.

What's the catch? 

Many states, including Oregon do NOT offer mortgage credit certificates; nearby Idaho does offer MCC's.  

A FDIC Affordable Lending Guide HERE lists state housing finance agencies and includes an indicator showing if they offer MCC's. [The City of Portland offers MCC's, details HERE]. 

In recent years many states routinely have UNUSED private activity bond cap that is abandoned every year; IF Oregon had a MCC program the $139 million in cap abandoned in 2016 would have supported more than 600 MCC loans @$275,000. 

Conclusion:
The piggy backing of the MCC on top of the standard deduction and the use of already existing private activity bond cap for Mortgage Credit Certificates (especially if bond cap is not being used) can help increase homeownership for the growing number of filers who will NOT be itemizing under the new tax law. 

Originally created and posted on the Oregon Housing Blog.