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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Fiscal Cliff Deal Helps Housing

January 2, 2013

The industry can breath a sigh of relief with the final fiscal cliff deal bringing back a popular tax break on mortgage insurance premiums and debt forgiveness for borrowers who go through a short-sale or some other type of debt reduction. A topic that is still up for discussion and likely to surface later in the year is whether the popular home loan interest tax deduction will be part of a long-term deficit reduction plan. Still, the deal passed by the Senate and House on Jan. 1 is one that leaves room for hope in the housing market. The American Taxpayer Relief Act of 2012 apparently extends a law that expired at the end of 2011, which allowed for the deductibility of MI premiums, according to a research report from Isaac Boltansky with Compass Point Research & Trading. The law now applies to fiscal years 2012 and 2013.

“The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual MI premiums,” Compass Point said. “Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private MI as well FHA mortgage insurance and VA and Rural Housing Service fees. In 2009, about 3.6 million taxpayers claimed the MI deduction,” the research firm added.

One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31. The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through principal forgiveness or a short sale are exempt from being taxed on the forgiven amount. “The amount extends up to $2 million of debt forgiven on the homeowner’s principal residence,” Compass Point Research & Trading said. “For homeowner’s to qualify, their debt must have been used to ‘buy, build, or substantially improve’ their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5-year sunset provision, will now be in effect until Jan. 1, 2014.”

Another win for housing is a provision tied to the government’s plan to increase the capital gains tax rate from 15% to 20% for individuals who earn more than $400,000. While in theory, this is harder on higher-income homeowners, Compass Point sees a silver lining through an exclusion. Compass Point notes the law “states that only gains of more than $250,000 for individuals ($500k for households) are subject to taxes on the excess portion of capital gains. Point being, in order for an individual homeowner to be impacted by the increased capital gains tax rate they would need to have an adjusted gross income above $400,000 and gain more than $250,000 from the sale of the property. Since this exclusion threshold remained intact, the impact of the capital gains tax increase is limited.” Source: HousingWire


Sales Tip: How To Approach Realtors (or any target)

June 2, 2011

Sales Tip: How To Approach Realtors (or any target)

I get this question all the time–how do I approach a Realtor or other referral source?  They seem to shut me out.  Well the key is in the approach angle.  Here are a few keys…

  1. First, it is all about targeting. I guarantee you if you approach the wrong target, you will get the wrong result.  What is the right target? Well, for example, someone who is open to working with someone new (does not have relationship interference) –not just someone you want to work with. Are you guys compatible ethically, technologically and geographically?  Do your research first!
  2. Do not approach as a cold call.  Cold calling will hurt your results dramatically. Do your networking and make sure you get a warm introduction. I don’t care if it is from another Realtor, a vendor or even a church member.
  3. When you get there–don’t hammer them for business. Flatter them–I respect your opinion. Ask for their advice.  Find out information.  Of course, look for openings in which you can follow-up and keep the relationship going. 
  4. Ask questions you will get an affirmative answer to.  For example, do you have a deal for me now?  80% chance of a no.  What do you think is the best way for me to help Realtors with their business?  98% chance for a positive answer.
  5. Don’t ask questions about something you should already know.  Are you a listing agent?  Where did you go to school?  You can get these answers on the Internet. Google them.  Review their site.  Do your research in preparation for the meeting.
  6. Remember to talk about what is of interest to them.  They are interested in selling more homes–not mortgages.  If you talk about your service, price and products, they have heard it before. How are you going to help them sell more homes?
  7. Use the meeting to network.  Do they know someone it would be important for you to meet (another Realtor, a vendor, a CPA)?

The right approach will make all the difference in the world.