Mortgage Revenue Bonds and Mortgage Credit Certificates (MRB / MCC)

How It Works

Mortgage revenue bonds (MRBs) are tax-exempt bonds that a state or local housing finance agency sells to investors. Because investors owe no federal income tax on the interest, they accept a lower rate. The agency uses the money to fund home loans made through participating lenders, and passes the lower borrowing cost on to buyers. Federal law limits the markup: the effective mortgage rate can be no more than 1.125 percentage points above the bond yield.

A mortgage credit certificate (MCC) delivers a similar benefit without a bond sale. An agency gives up some of its bond authority and issues certificates instead. A buyer with an MCC takes out an ordinary mortgage and claims a federal tax credit each year equal to a set percentage of the interest paid.

• The credit rate must be between 10% and 50%.
• If the rate is above 20%, the credit is capped at $2,000 a year.
• Credit that exceeds the buyer’s tax bill can be carried forward for up to three years.
• Buyers who itemize must reduce their mortgage interest deduction by the amount of the credit.

Suppose a buyer paid $12,000 in interest in a year and held an MCC with a 20% rate. The credit would be $2,400, as long as the buyer owed at least that much federal tax.

Who It Serves

At least 95% of bond proceeds must go to first-time homebuyers, meaning people who have not owned a principal residence in the past three years. That rule is waived in targeted areas and, one time, for veterans.

The median family income used is the area’s or the state’s, whichever is higher. High-cost areas can qualify for a higher income limit, up to 140%. These ceilings reach well above the 60% to 80% of area median income that most rental programs serve. That reach makes MRBs and MCCs a key federal tax tool for moderate-income and workforce homeownership.

How to Access It

Buyers do not apply to the IRS. They apply through a lender approved by their state or local housing finance agency, which sets its own limits within the federal caps and decides whether to offer bond loans, MCCs, or both. MCC holders claim the credit each year on IRS Form 8396.

History

Congress first wrote rules for single-family mortgage bonds in the Mortgage Subsidy Bond Tax Act of 1980. The Tax Reform Act of 1984 added the MCC option, effective for interest paid after 1984. The Tax Reform Act of 1986 moved the bond rules into today’s Section 143.

Limitations

• Shared volume cap. Single-family bonds compete with multifamily housing bonds and other uses for each state’s limited private activity bond authority.
• Recapture tax. For both bond loans and MCCs, a seller may owe tax if they sell within nine years, at a gain, after their income has risen past the original limit grown by 5% a year. All three conditions must apply. The tax can be no more than 6.25% of the highest loan balance or half the gain, whichever is less. Issuers must explain this at closing, but it adds complexity for buyers.
• Fixed dollar figures. The $2,000 credit cap is written into the law and is not indexed to inflation.
• Value depends on taxes. An MCC helps only buyers with enough federal tax liability to use the credit.