Many providers of mortgage insurance were severely affected by the housing crisis, resulting in a general increase in mortgage insurance premiums. The IRS recently issued temporary regulations that explain how to properly determine the deductible amount of mortgage insurance premiums (T.D. 9449). These newly issued regulations describe how to calculate the amount of prepaid qualified mortgage insurance premiums that may be treated as qualified residence interest for each tax year under Sec. 163(h)(4)(F). The temporary regulations provide guidance to reporting entities receiving premiums, including prepaid premiums, for mortgage insurance and reflect changes to the law made by the Tax Relief and Health Care Act of 2006, P.L. 109-432, and the Mortgage Forgiveness Debt Relief Act of 2007, P.L. 110-142.
In general, the new provisions treat certain qualified mortgage insurance premiums as qualified residence interest. This treatment applies only to certain qualified mortgage insurance premiums paid or accrued on or after January 1, 2007, and on or before December 31, 2010, on mortgage insurance contracts issued on or after January 1, 2007.
Sec. 163 and Qualified Mortgage Insurance Premiums
Mortgage insurance premiums are deductible as qualified mortgage interest if the premiums are paid or accrued in connection with acquisition indebtedness for a qualified residence.
Sec. 163(h)(4)(E) defines qualified mortgage insurance as:
- Mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration; and
- Private mortgage insurance (as defined by Section 2 of the Homeowners Protection Act of 1998, P.L. 105-216 (12 U.S.C. §4901), as in effect on December 20, 2006).
The amount treated as qualified residence interest is reduced under Sec. 163(h) (3)(E)(ii) by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that the taxpayer’s adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return).
Mortgage insurance premiums are amortized annually by allocating the premiums to a capital account and treating them as paid in the periods to which the amount is allocated. However, no deduction is allowed for the unamortized balance of the account if the mortgage is satisfied before the end of its term. Importantly, the allocation rules do not apply to amounts paid for qualified mortgage insurance provided by the Veterans Administration or the Rural Housing Administration. In addition, Sec. 163(h)(3)(E)(iv)(II) disallows a deduction for amounts allocable to any period after December 31, 2010.
Information Return Requirement for Persons Receiving Mortgage Insurance Premiums
Section 419 of the 2006 Tax Relief and Health Care Act also added Sec. 6050H(h) to the Code, which provides that any person who, in the course of a trade or business, receives from an individual premiums for mortgage insurance aggregating $600 or more for any calendar year must file a Form 1098, Mortgage Interest Statement.
The temporary regulations generally adopt rules that had been issued in Notice 2008-15. They offer guidance to individual taxpayers in determining the amount of prepaid qualified mortgage insurance premiums that can be treated as qualified residence interest under Sec. 163(h)(3)(E) and that may be deducted. The regulations also offer guidance to reporting entities receiving premiums, including prepaid premiums, for mortgage insurance. They provide that an individual taxpayer may allocate the prepaid premium ratably over the shorter of (1) the stated term of the mortgage or (2) 84 months, beginning with the month in which the insurance was obtained (Temp. Regs. Sec. 1.163- 11T). The temporary regulations also provide that reporting entities receiving mortgage insurance premiums of $600 or more during a calendar year from an individual taxpayer must report the amount of all mortgage insurance premiums, including prepaid mortgage insurance premiums, received during that year (Temp. Regs. Sec. 1.6050H-3T).
Whether a person receives $600 or more of mortgage insurance premiums is determined on a mortgage-by-mortgage basis. A recipient need not aggregate mortgage insurance premiums received on all an individual’s mortgages to determine whether the $600 threshold is met. Therefore, a recipient need not report mortgage insurance premiums of less than $600 received on a mortgage, even though it receives a total of $600 or more of mortgage insurance premiums on all the mortgages for an individual for a calendar year.
The housing crisis has affected mortgage insurance premiums. Allowing such premiums to be amortized and deducted as mortgage interest provides some relief to affected taxpayers. These temporary regulations add clarity to the process of determining the amount of the prepaid premium that is treated as qualified residence interest each tax year, and they also provide guidance to reporting entities receiving premiums, both regular and prepaid, for mortgage insurance.
Mark Cook is a partner at Singer Lewak LLP in Irvine, CA.
Unless otherwise noted, contributors are members of or associated with Singer Lewak LLP.The editor would like to offer a special thanks to Jennifer Allison, J.D., for her assistance with this column.
For additional information about these items, contact Mr. Cook at (949) 261-8600, ext. 2143, or firstname.lastname@example.org.