Form 8396 Explained: US Mortgage Interest Credit for Australians in 2025

For Australians who own property in the United States, are US citizens living abroad, or have financial interests that cross the Pacific, understanding the ins and outs of US tax forms can be daunting. One document that often flies under the radar is Form 8396: the Mortgage Interest Credit. While this form is primarily a US tax benefit, it can have real implications for Australians with US property or those navigating expat tax obligations.

What is Form 8396 and Who Should Care?

Form 8396 is used by US taxpayers to claim the Mortgage Interest Credit, a tax break designed to make home ownership more affordable for lower- and moderate-income buyers. The credit is available to those who have a Mortgage Credit Certificate (MCC) issued by a state or local government agency under a qualified program. In 2025, the credit remains a valuable way to offset US tax owed—especially relevant for Australians who:

• Are dual citizens or US permanent residents living in Australia

• Own US real estate purchased with a qualifying MCC

• File a US tax return due to citizenship or income requirements

This credit is claimed annually and directly reduces the amount of US federal income tax owed—unlike a deduction, which only reduces taxable income.

2025 Updates: What’s New with Form 8396?

In the wake of the US 2025 federal budget and tax policy updates, there have been a few key changes that Australians with US property should note:

• Adjusted Credit Limits: For 2025, the maximum credit rate remains capped at 20-25% of annual mortgage interest paid, but some US states have updated their MCC programs and limits.

• Electronic Filing Requirements: The IRS now requires all Form 8396 submissions to be filed electronically unless a waiver applies, streamlining processing but demanding more digital literacy from expats.

• Increased Scrutiny on Residency: The US IRS continues to tighten rules around principal residency for credit eligibility. Australians who rent out their US property or split time between countries must pay close attention to occupancy requirements.

Staying updated on both US federal and state-specific rules is essential, as MCC programs are administered at the state or local level and can differ substantially.

Practical Scenarios: How Australians Use Form 8396

Let’s look at some real-world examples to illustrate how Form 8396 can benefit Australians:

• Case Study 1: The Expat Homeowner Sarah, an Australian who holds dual citizenship, bought a home in California while working in the US and obtained an MCC through a state program. Now living back in Sydney but renting her US property, she’s ineligible for the credit in 2025 as the home is no longer her primary residence.

• Case Study 2: The Frequent Traveller David, an Australian investor who spends half the year in Florida, keeps his US home as his principal address and maintains eligibility for the credit. In 2025, he files Form 8396 electronically, claiming a $2,000 credit against his US tax due.

• Case Study 3: The Cross-Border Family The Chens, a family with Australian and US ties, use a US mortgage with an MCC to buy a holiday home in Hawaii. As non-residents, they’re ineligible for the credit, highlighting the importance of the principal residence rule.

Tips for Maximising the Mortgage Interest Credit

• Keep Documentation: Retain your MCC and all mortgage statements—these are needed for Form 8396 filing and for any IRS queries.

• Coordinate with State Agencies: Since MCCs are state-administered, check for program changes annually and consult the issuing agency for guidance.

• Monitor Policy Shifts: The US Congress occasionally debates the future of MCCs and mortgage credits, so watch for legislative changes that could impact eligibility or credit size.

• Don’t Double-Dip: You can’t claim the same interest amount as both a deduction and a credit—calculate which option provides the greatest benefit for your situation.

Conclusion: Is Form 8396 Worth Your Attention?

For Australians with US property or expat tax obligations, Form 8396 remains a powerful—if sometimes overlooked—tool for reducing US tax in 2025. However, its benefits hinge on meeting specific residency and program requirements, so regular reviews of your property status and MCC program updates are essential.