J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

25.18 Mortgage Interest Credit

Under special state and local programs, you may obtain a “mortgage credit certificate” to finance the purchase of a principal residence or to borrow funds for certain home improvements. Generally, a qualifying principal residence may not cost more than 90% of the average area purchase price, 110% in certain targeted areas. A tax credit for interest paid on the mortgage may be claimed. The credit is computed on Form 8396 and claimed on Form 1040. The credit equals the interest paid multiplied by the certificate rate set by the governmental authority, but if the credit rate is over 20%, the credit is limited to $2,000.

Liability limit and carryover.

The mortgage interest credit is subject to a tax liability limit and any excess is nonrefundable. The tax liability limitation is figured on Form 8396. However, if your allowable credit exceeds the liability limitation, the unused credit can be carried forward for up to three years.

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Caution

Recapture of Mortgage Subsidy

If within nine years of receiving a mortgage credit certificate you sell or dispose of your home at a gain, the mortgage subsidy you received generally must be recaptured as income. See Form 8828 for details.

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Mortgage interest deduction must be reduced.

If you itemize deductions, you must reduce your home mortgage interest deduction (15.1) by ...