Will Premiums Paid for Mortgage Insurance Soon Be Tax-Deductible?
Kranacher, Mary-Jo, The CPA Journal
More than 12 million homeowners hope to get a tax break from their mortgage insurance premium payments, through recently proposed legislation. Whether private or government-backed, mortgage insurance was created to protect lenders from risk of loss in the event a borrower defaults on a mortgage loan. Private mortgage insurance (PMI) is currently required on all home purchases with a down payment of less than 20%. Government-backed mortgage insurance, such as through the Federal Housing Administration, is used for borrowers with less than 3% down and imperfect credit. Most homeowners pay the insurance as an added charge to their monthly principal, interest, tax, and insurance payments. This additional charge usually ranges from $50 to $150, depending upon the purchase price and the down payment shortfall.
With housing prices outpacing incomes, home loans needing private mortgage insurance increased 73% in 2001, representing a record $283 billion in new private mortgage insurance business, according to the Office of Federal Housing Enterprise Oversight. Allowing borrowers to deduct their annual mortgage insurance premiums might enable some potential homeowners, especially first-time homebuyers, to afford their own home. A reduction of after-tax mortgage costs might also qualify many previously ineligible renters to purchase a home.
Federal legislators recently proposed bipartisan bills in the U.S. House of Representatives (HR1336) and the U.S. Senate (S846) to amend the IRC to allow for mortgage insurance premium deductions. The considered legislation, which was also cited as the "Mortgage Insurance Fairness Act," would have effectively treated the premiums paid for "qualified" mortgage insurance as "qualified residence interest."
The bill had some restrictions, which primarily limited high-income taxpayers' benefits. For example, the amount otherwise allowable as a deduction would be subject to a phase-out: a 10% reduction for each $1,000 that the taxpayer's adjusted gross income for the taxable year exceeds $100,000 ($500 and $50,000, respectively, if married filing separate returns). Accordingly, this bill targeted middle-income borrowers, a majority of whom use private or government-backed insurance with their home purchases, as the main tax relief beneficiaries. …