The “New” Mortgage Insurance Deduction

January 7, 2013

From MGIC on the mortgage insurance deduction passed as part of the fiscal cliff deal

MI basics: tax-deductible MI

MI Tax Deductibility passed as part of the American Taxpayer Relief Act of 2012.

Borrower-paid MI premiums are tax-deductible through the year 2013. Borrowers should consult their tax advisors regarding MI tax deductibility. See disclaimer note below.

FAQs

Does the bill apply to MGIC mortgage insurance?

Yes, borrower-paid MI provided by MGIC qualifies for the deduction. This includes our Monthly, Single and Split Premium plans. There are varied opinions on the deductibility of lender-paid MI as the IRS has not yet clarified the deductibility. It is recommended that borrowers consult their tax advisors regarding the amount that is deductible.

What types of mortgage loans qualify for the MI tax deduction?

Loans used for “acquisition indebtedness” — that is, money borrowed to buy, build or substantially improve a residence — are eligible, as long as the debt is secured by the same residence.

This includes purchase loans and refinance loans, up to the original acquisition indebtedness. (Money borrowed against the equity in a home or when refinancing a home for any reason other than to buy, build or substantially improve a residence is called “equity indebtedness.”)

When refinancing a piggyback loan originally used to acquire a property, is the original loan amount considered the sum of the two mortgages or only the primary mortgage amount without the second lien included?

The original acquisition indebtedness is considered to be the sum of the two mortgages.

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Is deductibility applicable for all loan types?

There is no differentiation among loan types.

What types of properties are eligible for tax deductibility?

The deduction applies to “qualified residences,” as defined in the Internal Revenue Code. Generally, that includes the borrower’s primary residence and a nonrental second home. As with mortgage interest, borrowers can deduct mortgage insurance premiums paid on both their primary residence and one other qualified residence each year. Investor loans are not eligible.

Who qualifies for this itemized deduction?

Households with adjusted gross incomes of $100,000 or less will be able to deduct 100% of their MI premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, phasing out after $109,000. (Details below.)

Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their MI premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500. (Details below.)

The deduction is not restricted to first-time homebuyers.

 

Adjusted Gross Income Limits
Single OR
Married, Filing
Jointly
Allowable
MI Premium Deduction
Married,
Filing
Separately
Allowable
MI Premium Deduction
$0 – $100,000 100% $0 – $50,000 50%
$100,000.01 – $101,000 90% $50,000.01 – $50,500 45%
$101,000.01 – $102,000 80% $50,500.01 – $51,000 40%
$102,000.01 – $103,000 70% $51,000.01 – $51,500 35%
$103,000.01 – $104,000 60% $51,500.01 – $52,000 30%
$104,000.01 – $105,000 50% $52,000.01 – $52,500 25%
$105,000.01 – $106,000 40% $52,500.01 – $53,000 20%
$106,000.01 – $107,000 30% $53,000.01 – $53,500 15%
$107,000.01 – $108,000 20% $53,500.01 – $54,000 10%
$108,000.01 – $109,000 10% $54,000.01 – $54,500 5%

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Is adjusted gross income calculated before or after deductions?

Adjusted gross income is calculated before itemized deductions, including the MI deduction.

How does the MI tax deduction work?

Borrowers who itemize deductions are able to reduce their overall taxable income in the same manner as mortgage interest.

Are borrower-paid, single premiums, which are paid up front in a lump sum, eligible for the deduction?

Yes, borrower-paid, single-premiums are eligible for the deduction under the new law. Borrowers should consult with a professional tax advisor to determine the amount of the MI premium eligible for the tax deduction.

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If the single premium is financed, are both the mortgage insurance premium and the interest tax deductible?

We believe that if the loan is for acquisition indebtedness, both the interest attributable to the entire loan balance as well as the allocated portion of the mortgage insurance premium are tax deductible.

How would a premium refund issued during the tax year affect eligibility and the amount of the MI deduction?

Borrowers are only permitted to deduct that portion of their MI premium attributable to a tax year. If the MI is dropped, and a refund is paid, the amount refunded would reduce the amount of MI premium that could be attributable to that tax year and be deducted.

Note: MGIC cannot provide tax advice. Taxpayers should consult their tax advisor to ascertain if they are eligible to take this deduction. The answers to these questions are based on an interpretation of the language of the statute, the Joint Committee on Taxation’s Technical Explanation of the statutory language, and present law. The Internal Revenue Service (“IRS”) will issue guidance interpreting the new provision, and could reach different conclusions for some of the issues raised.

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FHA Extends Flipping Waiver

December 3, 2012

An anti-flipping requirement on home loans insured by the Federal Housing Administration that was waived during the depths of the housing market meltdown and subsequently extended has been extended again. This time around, the term of the extension was doubled. On home purchase transactions, properties securing FHA loans cannot have been acquired during the prior 90 days. However, the Department of Housing and Urban Development waived the requirement in May 2010.

The waiver impacted sales contracts executed between Feb. 1, 2010, and Feb. 1, 2011.”During this period of high foreclosures, FHA seeks to encourage investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes,” HUD explained at the time. In a January 2011 statement proclaiming the waiver a success with more than 21,000 home loans insured for over $3.6 billion as a result of the exemption, then-federal housing commissioner David H. Stevens said that the exemption would be extended until Dec. 31, 2011.

A few days before the extension was set to expire, another extension was announced until the end of this year. HUD has, yet again, decided to extend the anti-flipping waiver, according to a Federal Register notice. This time around, however, HUD is taking a longer-term approach — extending the waiver two years until Dec. 31, 2014.

Qualified transactions must be arms-length with no identity of interest between the buyer and seller or other parties. Price increases in excess of 20 percent must be justified by a second FHA appraisal or supported by documented renovation costs. If there aren’t sufficient renovation expenditures, then the appraiser needs to provide an appropriate explanation for the increase in value. In addition, property inspections are needed, and any needed repairs for “health and safety” issues that are identified need to be completed prior to closing.

“Through the regulatory waiver, FHA encourages investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes, with the objective of increasing the availability of affordable homes for first-time and other purchasers, helping to stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high,” the filing stated. Source: Mortgage Daily