There are two small changes in the tax code this year that may benefit some
homeowners. If you think you qualify for these changes, research the guidelines
at www.irs.gov or contact your
tax advisor.
The first change is actually an extension. In late 2006 Congress passed a law
allowing a rather strange one-year deduction of premiums for private
mortgage insurance (PMI). This was a scrap thrown to PMI insurers who had
been complaining that their businesses were suffering from the number of homeowners
opting for piggyback mortgages. These simultaneous second mortgages were used
for a house down payment, eliminating the need for PMI and providing an additional
mortgage interest deduction.
This deduction required that the policy be taken out and paid for in 2006 (tough
luck for homeowners struggling with premiums from earlier years,) was for home
acquisition not refinancing, and the deduction was available for 2006 only.
Now this deduction has been extended for 2007 provided that
the PMI contract was entered into in 2006 or 2007 and that payments for the
more recent year were made before 2008. PMI premiums are treated as mortgage
interest on Schedule A so taxpayers must itemize in order to claim the deduction
and the taxpayer’s gross income must be under $50,000 for an individual
or $100,000 for a couple filing jointly. A portion of this deduction may be
available for higher earners; again, consult the regulations or your tax advisor.
Homeowners whose homes were foreclosed in the last year or
who gave a deed in lieu of foreclosure or had a short sale approved by their
lender have been granted a new benefit by Congress.
In the past, when taxpayers ended up paying less than the total amount due
on their mortgage, the lender was required to issue a form, similar to a 1099,
for a cancellation of indebtedness income. Thus, a debtor who had lost his home
might find himself facing taxes on thousands of dollars in forgiven debt if
the house failed to fully repay the mortgage at auction.
Under The Mortgage Forgiveness Debt Relief Act of 2007, up
to $2 million of the cancelled debt on a principal mortgage is now tax free.
The new law does not apply to investment property.