 |
| 30 Yr Fix |
6.05% |
-0.01% |
| 15 Yr Fix |
5.60% |
0.01% |
| 1 Yr ARM |
5.29% |
0.00% |
| 5/1 ARM |
5.67% |
-0.06% |
| 30 Yr Tres |
4.56% |
-0.06% |
| Fed Prime |
5.00% |
-0.25% |
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An Update on PMI Tax Deductions
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In December we published an article about a provision in the Tax Relief and
Health Care Act of 2006 which was passed in the waning days of the 109th Congress
(December 12, PMI
Deduction Buried in the Closing Acts of Congress.) The bill, H.R. 6111 contained,
among dozens of other provisions and a boxcar of earmarks and pieces of pork,
a section that would provide some tax relief to homeowners who were obliged,
by virtue of down payments of less than 20 percent on their homes, to carry
private mortgage insurance (PMI.)
At that time the final version of the bill was not publicly available,
nor is it now, but here is an update and the news is not quite
as good for the taxpayer as it first appeared.
The House overwhelmingly approved H.R.
6111 on December 8 and the Senate passed corresponding legislation on December
9. The President signed the bill, probably on December 20, and it is now known
as Public Law Number 109-432. As of January 25 the Government Printing
Office had not produced a final printed copy of the bill.
At the time of our original article we noted that H.R. 6111 appeared to include
provisions from H.R. (which stands for House Resolution) 6408 and Senate 132.
At the time it was presented to the House in early December it contained the
following wording in Section 419:
Section 6050H of the Internal Revenue Code of 1986 (relating to mortgage interest)
is amended by adding at the end the following new subsection:
In general.--Premiums paid or accrued for qualified mortgage insurance by a
taxpayer during the taxable year in connection with acquisition indebtedness
with respect to a qualified residence of the taxpayer shall be treated for purposes
of this section as interest which is qualified residence interest.
We are relying on information on the law as signed by President Bush provided
by BNA Tax Management a tax advisory site. According
to BNA the following restrictions apply to what seemed like a general deduction
for homeowners for private mortgage insurance premiums. These may have come
about during conferences to resolve differences between House and Senate versions
or may have been earlier defined by Section 6050H of the IRS Code to which Section
419 was appended.
The Act defines qualified mortgage insurance as that provided
by the VA, the FHA, or the Rural Housing Administration or by private carriers
and specifies that it be treated as interest on a qualified residence. This,
however, is modified by the following "that premiums paid or accrued for
qualified mortgage insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness." This is interpreted by BNA as meaning
that the deduction is only available to homeowners who assume PMI payments during
2007. In other words, you may not qualify for the deduction if you bought a
house subject to PMI in 2006 or earlier even though you are currently paying
premiums.
Deductions seem to be further limited to 2007 by the following: no benefit
will currently accrue to taxpayers for any amount paid or accrued beyond December
31 of this year "or properly allocable to any period after that date."
We are not lawyers or tax authorities and we advise you, strongly, to consult
your own tax professional, but it appears that this deduction is only
available to taxpayers during the current calendar year and that paying premiums
ahead as taxpayers are often advised to do with mortgage interest or property
taxes at year end when deductions are needed will not work in this situation.
As we stated in our earlier article, the original House and Senate legislation
was income-limited to $100,000 per household (or $50,000 for married homeowners
filing separately) - a provision that appeared to disappear from the bill
that was finally voted on in December. BNA, however, states that this provision
did survive into the final version and that the allowable deduction for PMI
is phased out by 10 percent for each $1000 the taxpayers adjusted gross income
exceeds $100,000 (or every $500 above $50,000 for the married who file separately.)
This would mean that the deduction is not available for anyone with adjusted
income exceeding $110,000 or $55,000.
So, it appears that few homebuyers will be eligible to use this PMI
deduction and that it will only be available for 12 months. It seems
strange that Congress would pass such limited legislation and interpretations
could be different as corresponding IRS regulations are written. Still, if you
buy a house or refinance this year make a mental note to alert your
tax advisor to check on this small perk before you file for the tax
year ending December 31, 2007.
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Comments (17)
| The PMI tax deduction has been extended. So everyone bashing the government needs to tone it down and relax. If you don't want to pay PMI or get stuck with a higher rate from TAMI, then learn to save some money and put 20% down. There are many at fault for this mortgage environment, but the consumer society we have because is partially to blame. Stop buying the latest technology or the little bit more expensive cars. |
|
| Above Posted By:
Bobby
| Thu, 10 Apr 2008 15:57:33 EST |
| Why do we have PMI and who does it protect? |
|
| Above Posted By:
Cyndee
| Mon, 17 Mar 2008 20:53:09 EST |
| Its pretty sad our goverment cant seem to do anything for its citizens.....if you have PMI insurance as of 2007 and only 2007 you got a tax break ...wow ...such a help for everyone struggling to pay it...as high as 258.00 a month it should be illegal...at that rate it seems to cause more hardship on keeping a mortgage current....but thats the goverment does nothing beneficial it wouldnt want to hurt those big companies ......... |
|
| Above Posted By:
Debbie
| Sat, 26 Jan 2008 00:31:09 EST |
| I agree with Irvin. What about the rest of us who purchased our homes or refinanced prior to 2007? What is being done to extend this relief to all Americans? Note, the folks who are experiencing hardships due to declining FMV, adjustable rates, predatory lending and exotic loan products are not the people who purchased or refinanced in 2007. This doesn't make any sense!!!
|
|
| Above Posted By:
Marianne
| Thu, 24 Jan 2008 12:11:26 EST |
| link to IRS article regarding PMI is http://www.irs.gov/faqs/faq11-2.html if this can be imbedded in the comment. - irv |
|
| Above Posted By:
Irvin Wilson
| Tue, 9 Oct 2007 14:54:49 EST |
| It should be noted that PMI is tax deductible on investment (rental) properties just like any other expense. This is a common misconception and has nothing to do with the legislation spoke of here. I can't put html in this comment but if you go to the IRS website (irs.gov) and search for PMI you'll see proof from the IRS itself. |
|
| Above Posted By:
Irvin Wilson
| Tue, 9 Oct 2007 14:37:06 EST |
| What an outrage! God forbid the government gives any relief to homeowners who got suckered in by the low interest bait and switch scam of Bush's first term. |
|
| Above Posted By:
Anonymous
| Sun, 16 Sep 2007 19:21:27 EST |
| Can you refi 20% of the original cost of the loan and then ask for the PMI to be dropped. I was under the impression that if you refinanced for 15 years and paid it off early it would be better than paying the cost of pmi which in no way benefits you the borrower |
|
| Above Posted By:
Grant
| Tue, 26 Jun 2007 21:00:00 EST |
| Is PMI Tax Deductible?
There has been a lot of talk about whether or not PMI is tax deductible lately.
In fact I recall a minor news blurb in the waning days of 2006 where they mentioned that President Bush had signed a bill that made law the PMI was deductible as mortgage interest.
However, when you try to research the topic, there appears to be conflicting information out there about it. Does anyone know authoritatively what the law says and please provide the talking points. |
|
| Above Posted By:
Ricardo Cobos
| Mon, 25 Jun 2007 12:50:21 EST |
| Can a buyer have a seller pre-pay the PMI policy, or the buyer pre-pay the policy so the entire PMI for the loan is deductable in 2007, instead of spreading out the premiums beyond 2007? |
|
| Above Posted By:
Mike
| Thu, 17 May 2007 08:14:00 EST |
| >It beats traditional PMI in almost every single scenario.
John, actually it doesn't. With TAMI or lender paid PMI, that cost sticks with buyer for the full term of the mortgage. With traditional PMI, the extra cost is typically paid off within a 7-9 year timeframe. |
|
| Above Posted By:
Jeff
| Fri, 13 Apr 2007 20:18:35 EST |
| Actually Mary, that does still exist! It is called "Tax Advantage Mortgage Insurance" (TAMI for short). Essentially, a borrower takes a slightly higher rate and is not charged a traditional PMI factor. Since home mortgage interest is tax deductible (consult your tax advisor), the PMI is converted into interest, and is now deductible. It beats traditional PMI in almost every single scenario. |
|
| Above Posted By:
John
| Thu, 22 Mar 2007 17:12:39 EST |
| I would be hard pressed to advise a client to go this route, at least for the year of 2007. I would want the law to actually be approved for the deduction beyond 2007.
Years ago, lenders offered borrowers the ability to "tack on" the mortgage insurance premium into the actual interest rate on the loan. This would make the premium tax deductible as it would be interest paid on a mortgage.
Let's hope that lenders will bring that bell/whistle back to the mortgage market |
|
| Above Posted By:
Mary Supinger
| Mon, 19 Feb 2007 04:23:39 EST |
| As a Tax Professional and Mortgage Broker, I would have to agree with "km"'s comment. Most tax credits when first introduced are supposedly only for a limited time but then they are extended. I would caution my client that it COULD just be for the year of 2007 but in my heart I really do think it will continue. That's just my 2 cents worth! Thanks |
|
| Above Posted By:
Lynn
| Fri, 9 Feb 2007 17:14:25 EST |
| Actually, it's not as bad as you are portraying. New tax laws being put in for one year is very common and it will almost definitely be extended (remember it's an election year and no lawmaker is going to take something away from homebuyers). Actually, mortgage interest was introduced this way. Also, the R&D tax credit has been this way since 1985, extended every year. Also, NAR recently said that 86% of first time buyers make less than 100k. Also, it DOES apply to refis, just not cashout. |
|
| Above Posted By:
km
| Wed, 31 Jan 2007 13:15:43 EST |
| It seems to me that the PMI deduction provision for 2007 would only be available for purchase money mortages, not refinances, due to the verbage "in connection with acquisition indebtedness". It may be further limited than you have reported. |
|
| Above Posted By:
Rebekah Gamble
| Tue, 30 Jan 2007 16:01:34 EST |
| This is an interesting tidbit to let my clients know about. So if I'm reading this thing correctly it is only valid for people who purchase/refi during the 2007 calender and as of January 1st, 2008 it will no longer be allowed...kind of odd to do but what the government does is always odd. I understand people previous to 2007 not being allowed to take advantage of it. |
|
| Above Posted By:
Rick Grand
| Tue, 30 Jan 2007 12:44:23 EST |
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