Mortgage Credit Certificate: How the MCC Tax Credit Works

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: a mortgage credit certificate (MCC) lets you claim a federal tax credit each year for a set percentage of the mortgage interest you pay on the loan amount the certificate names. The certificate comes from a public issuer with a qualified program, not from the lender, and you get it before you buy. The credit rate is 10 to 50 percent, the credit is capped at $2,000 a year when the rate is above 20 percent, any mortgage interest deduction you take goes down by the credit, and part of the benefit may have to be paid back if you sell within 9 years. This page covers federal law only. It is general information, not legal, tax or financial advice; ask a tax professional about your own return.

What an MCC is

The law allows a credit equal to the certificate credit rate times the interest you pay or accrue during the year on the remaining principal of the certified indebtedness amount (26 U.S.C. 25(a)(1), LII, read October 30, 2026). The certificate must be issued under a qualified mortgage credit certificate program by a governmental unit that has the authority to issue qualified mortgage bonds, in connection with buying, rehabilitating or improving your principal residence, and it must name the credit rate and the certified indebtedness amount (25(c)(1)). The program must meet the residence, 3-year, purchase price, income and targeted area rules of 26 U.S.C. 143 (25(c)(2)(A)(iii), LII); the 3-year rule looks for buyers who had no present ownership interest in a principal residence during the 3 years before the mortgage is signed, with exceptions (143(d)). Ask the issuer for its own income and price limits.

The IRS says the home must be your main home and must be in the area of the governmental unit that issued the certificate, that you cannot claim the credit on interest paid to a related person, and that certificates issued by the Federal Housing Administration, the Department of Veterans Affairs and the Farmers Home Administration do not qualify (Form 8396 instructions, IRS, 2025 form created August 28, 2025, read October 30, 2026; the 2026 form was not posted on the read date, so this may be out of date). IRS Publication 530 says you must contact the right government agency about an MCC before you get a mortgage and buy your home, and that an MCC is generally issued only with a new mortgage for buying your main home (IRS, 2025 edition, last reviewed or updated April 30, 2026). A certificate also cannot be used on a home with financing from a qualified mortgage bond (25(c)(2)(A)(iv)).

The credit rate and the $2,000 cap

The credit rate on the certificate must be at least 10 percent and no more than 50 percent (25(d)(1)).
If the rate is above 20 percent, the credit for a year cannot be more than $2,000; owners other than spouses filing jointly split the $2,000 in proportion to their interests in the home (25(a)(2)).
The credit cannot be more than your tax for the year after other listed credits; an unused part can be carried forward for 3 years (25(e)(1)). The IRS says any amount over the $2,000 cap cannot be carried forward (Form 8396 instructions).
The certificate stays in effect until the issuer revokes it or the home stops being your principal residence (25(e)(3)(A)).
If you refinance, the credit continues only if the issuer reissues the certificate, and the reissued one cannot raise the credit rate, the certified amount or the credit you could have claimed (25(e)(4); Form 8396 instructions).

If your loan is larger than the certified indebtedness amount, Publication 530 says to multiply the interest you paid by the certified amount divided by the original loan amount, and that this fraction does not change in later years.

The mortgage interest deduction goes down

The deduction for interest on a loan with an MCC is reduced by the credit allowable on that interest (26 U.S.C. 163(g), LII). The IRS says that if you itemize, you must reduce the home mortgage interest you deduct on Schedule A by the credit on Form 8396, line 3, even if part of it is carried forward. For the deduction itself, see IRS Publication 936 and the mortgage interest statement, Form 1098, which shows the interest your lender received; for mortgage insurance premiums, see the mortgage insurance premium tax deduction.

Example: the credit for one year

This example is only for the math, with example figures, not terms from any issuer or lender. It shows the credit before the limit based on your tax, and the deduction only if you itemize.

Item	Credit rate 20%	Credit rate 30%
Loan amount and certified amount (example)	$250,000 and $200,000	$250,000 and $200,000
Interest paid this year (example)	$16,000	$16,000
Interest counted: $16,000 × ($200,000 ÷ $250,000 = 80%)	$12,800	$12,800
Credit: $12,800 × rate	$2,560	$3,840, capped at $2,000 = $2,000
Interest left to deduct if you itemize: $16,000 − credit	$13,440	$14,000

Paying part back if you sell within 9 years

If you dispose of an interest in a home with an MCC loan, your tax for that year goes up by the lesser of the recapture amount or 50 percent of the gain, if any (26 U.S.C. 143(m)(1)). There is no recapture on a disposition because of death or one more than 9 years after the testing date (143(m)(2)), and the law has special rules for transfers between spouses and for homes rebuilt on the same site after a casualty (143(m)(6) and (8)). The recapture amount is the product of three figures (143(m)(4)):

the federally subsidized amount: 6.25 percent of the highest principal amount of the loan for which you were liable;
the holding period percentage: 20, 40, 60, 80 and 100 percent for years 1 to 5, then 80, 60, 40 and 20 percent for years 6 to 9, with a ratable cut if the loan was paid off in the first 4 years; and
the income percentage: your modified adjusted gross income in the year of sale minus the adjusted qualifying income for your family size, divided by $5,000, and no more than 100 percent.

The issuer must tell you about possible recapture at settlement and, within 90 days after the loan is made, send you the federally subsidized amount and the adjusted qualifying income for each family size for each of the 9 years (143(m)(7)). Keep that notice. You report the sale on Form 8828 (IRS and its instructions, both Rev. November 2024; may be out of date). The instructions say you must file it with your return if you sold or otherwise disposed of the home, the original loan was provided after December 31, 1990, and you received a federal mortgage subsidy, whether or not you had a gain; they also say a refinance alone does not cause recapture. Publication 523 says you may owe the recapture tax even if you can exclude the gain from income, and that you will not pay back any subsidy if you had a loss (IRS, 2025 edition, last reviewed or updated April 30, 2026).

Example: recapture on a sale in year 3

This example is only for the math, with example figures. Use the amounts in your issuer’s notice, not these.

Item	Amount
Federally subsidized amount: $250,000 × 6.25%	$15,625
Holding period percentage for a sale in year 3	60%
$15,625 × 60%	$9,375
Income percentage: $2,500 of income over the adjusted qualifying income ÷ $5,000	50%
Recapture amount: $9,375 × 50% (rounded to the dollar)	$4,688
50% of the gain: $40,000 × 50%	$20,000
Recapture tax: the lesser amount	$4,688

If the income in the year of sale were at or below the adjusted qualifying income, the income percentage would be zero and there would be no recapture tax.

MCCs and down payment help

Some public issuers also run down payment programs. Ask whether a second loan or grant changes your MCC, and read down payment assistance second loans. The Form 8828 instructions describe a qualifying subordinate mortgage loan or grant that may require you to share gain with the governmental lender if you sell within 9 years.

Questions to ask the issuer and lender

Is an MCC offered in my area now, and what are the income and purchase price limits?
What credit rate and certified indebtedness amount would my certificate show, and what fees apply?
Do I have to apply before I sign a purchase contract or before closing?
Which lenders take part in the program?
If I refinance later, how do I ask for a reissued certificate?
Where will I find the recapture notice with the federally subsidized amount and income table?

Checklist

Contact the issuer before you get a mortgage and buy.
Keep the certificate, the recapture notice and every Form 1098.
Each year, figure the credit on Form 8396 and lower any Schedule A interest deduction by the credit.
Track any carryforward for 3 years.
Before you sell within 9 years, look at Form 8828 and ask a tax professional.

To find housing counseling agencies that HUD has vetted, use the CFPB housing counselor search. You can submit a complaint at consumerfinance.gov/complaint.

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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

Mortgage Credit Certificates: The Federal MCC Tax Credit