Submitted by TERI TREADWAY , Wednesday, 29^th August 2007

Recent legislation makes mortgage insurance (MI) premiums tax deductible for the 2007 tax year. The legislation affects borrowers who close a loan on or after January 1, 2007 and pay a mortgage insurance premium. The following questions and answers provide details on how the legislation will work.

Legislation Timing

1. The bill states that it “shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007.” What does MI “contract issued” mean? Is it the insurance commitment date, insurance effective date, or something else? The loan closing date is the most logical way to interpret the language “mortgage insurance contract issued.” Any time before closing, the mortgage insurance contract could change as could other terms of the loan. The loan closing date is a “bright-line” date that the IRS can enforce.

2. Does this deduction apply only to insured loans made in 2007? Yes. The new deduction applies only to insured loans made in 2007.

3. Will the deduction for a borrower getting MI in 2007 expire if the bill isn’t extended? Yes. Technically speaking, the deduction only applies to amounts paid or accrued after December 31, 2006 and before January 1, 2008 with respect to mortgage insurance contracts issued after December 31, 2006. However, there is broad precedent for extending this type of expiring provision. (For example, the research and development credit entered the law as a temporary provision in 1981 and has been extended continuously since then, most recently in the same legislation that included the mortgage insurance deduction provision.) It is expected that this provision will be successfully extended before 2008.

4. Is the legislation “grandfathered” for homeowners who purchased their homes prior to 2007, but are currently paying MI? No. The legislation applies only to loans closed during the 2007 tax year.

Borrowers

5. How will an MI tax deduction help homeowners? The new MI tax deduction allows borrowers with up to $100,000 adjusted gross income a year to deduct the entire cost of their MI payments, boosting home ownership by reducing the cost of mortgage insurance.

6. Is this legislation for first-time home buyers only? No. The new legislation is not restricted to first-time home buyers, just households (married couples filing jointly or single borrowers) with an adjusted gross income (AGI) of $100,000 or less; the maximum AGI is $50,000 for married borrowers filing separately. Households with AGI of $100,000 or less may deduct 100% of MI premiums from taxable income.

Limitations on allowable premium deductions:
• The MI deduction is phased out by 10% per $1,000 of household AGI between $100,000 and $110,000. Deductions are not allowed for AGI over $110,000.
• The 10% phase out for married borrowers filing separately is $500 per $1,000 for AGI between $50,000 and $55,000. No deduction is allowed for AGI over $55,000.

7. If the deduction is taken, and later the borrower receives a refund for MI premiums, is that refund taxable as income? If the refund is for premiums that have not yet been deducted – as would generally be the case under the new provision when an up-front premium amount is amortized over the life of the mortgage insurance contract – the refund should not be taxable income to the borrower.

8. How much will a typical homeowner with MI save? Individual savings will vary, depending on the size of the loan, adjusted gross income, and tax bracket. On average, eligible homeowners are expected save $200 to $400 annually.

Borrower Income

9. Is the $100,000 based on gross or adjusted income? The $100,000 is based on a taxpayer’s adjusted gross income.

10. Does “household income” refer only to the taxpayers/borrowers income? (Note: the legislation refers to taxpayer income.) The income threshold phase-out is based on the taxpayer’s income for the taxable year (for example, a husband and wife are considered a “taxpayer” if they file jointly; adult children would not be included).

11. How does the phase-out formula work? Despite the reference to $110,000 in the technical explanation, the provision’s phase-out requires a 10% reduction of the amount for the deduction for each $1,000 (or fraction thereof) that the taxpayer’s adjusted gross income exceeds $100,000.

Adjusted Gross Income / Married Filing Jointly: Allowable MI Deduction
$100,000.00 or less: 100%
$100,000.01 – $101,000: 100% – 90%
$101,000.01 – $102,000: 90% – 80%
$102,000.01 – $103,000: 80% – 70%
$103,000.01 – $104,000: 70% – 60%
$104,000.01 – $105,000: 60% – 50%
$105,000.01 – $106,000: 50% – 40%
$106,000.01 – $107,000: 40% – 30%
$107,000.01 – $108,000: 30% – 20%
$108,000.01 – $109,000: 20% – 10%
$109,000.01 – $110,000: 10% – 0%

Properties

12. Is this deduction limited to only primary residences? No. “Qualified residence” includes the taxpayer’s principal residence and one other residence selected by the taxpayer for the deduction. This could be a vacation home – but not an investment property, because the property must be a principal residence of the taxpayer or another residence that is used for personal purposes by the taxpayer.

13. Is a “qualified residence” that as described in the IRS tax code 163(h) (4)(A)? Yes.

Loan Types

14. Are investor loans eligible? No, investor loans are not eligible.

15. Does the bill allow the tax deduction for refinances as well as purchases? If so, are there limitations on the refinance terms? Yes. Like the existing deduction for mortgage interest for aquisition indebtedness, the provision includes refinancings up to the amount of the refinanced indebtedness.

16. What about an insured acquisition second mortgage? Can those premiums be deducted? As long as the loan meets the definition of “acquisition indebtedness,” mortgage insurance premiums associated with the second loan should be deductible. However, while technically deductible, it seems unlikely that a second loan obtained much later in time than the first would be insured.

17. When refinancing a piggyback loan, for purposes of the deduction, is the original loan amount considered the sum of the two mortgages or only the primary mortgage amount without the second lien included? The loan amount will be the sum of the two mortgages.

Single Premiums

18. What about single premiums? Can they be deducted in one calendar year? Generally, the provision requires that MI that is allocated (by the insurer) to periods after the close of the taxable year should be treated as paid in the period to which they are allocated. Thus, single premiums must be amortized over the life of the mortgage insurance contract and cannot be fully deducted in one calendar year.

19. Borrowers generally finance the up-front single premium rolling it into the mortgage loan amount. Is this amount deductible as interest, or as MI premium? This amount is deductible as mortgage insurance premium. See answer to #18.

20. Would the allowable deduction for single premium MI be handled any differently from monthly-premium MI? A borrower would have a larger deduction for a single premium MI product in 2007 than if deducting only the monthly MI premiums. If any MI premium – whether single or monthly – could be deducted in total (assuming a household income below or equal to $100,000) that would be a strong benefit. Only a portion of the single premium could be deducted for 2007 tax purposes.

21. If a financed single premium is paid by the seller as a concession, who – if anyone – gets the deduction? Theoretically, this would be analogous to “points” paid at closing, and should be deductible by the borrower regardless of how it appears on the closing statement. A concession by the seller to pay something at closing is a purchase price adjustment; regardless of how it is described and whether it is viewed as points or mortgage insurance, the cost is borne by the buyer. However, because mortgage insurance premium deductibility is a new issue, the IRS may not reach the same conclusion. Regulations may be required to answer this question.

22. If the borrower-paid single premium is financed, would the MI tax deduction be allowed above and beyond the interest paid on the financed premium? If so, would the same capitalization rules apply as the single premium paid upfront? See answer to #18. The interest paid on the financed premium is different from the deduction for the MI premium, which must be amortized. Both are deductible.

Lenders and Loan Servicers

23. Are lenders or loan servicers responsible for 1098 reporting to the IRS? This reporting requirement parallels that for the existing mortgage interest deduction. The provision requires that any person (or company) receiving payments of mortgage insurance premiums aggregating $600 or more for any calendar year to file an information return with the IRS and to provide a copy of such return to the individual making such payments. The lender generally is best positioned to have and provide this information, but until regulations are issued, there is no certainty regarding this responsibility.

24. Do originators have any responsibility in the HUD 1 Disclosure with regard to the MI deduction? Originators do not address issues of tax deductibility in disclosure documents.

25. Are lenders now obligated to report receipt and disbursement of MI premiums as is required for mortgage interest and real estate taxes? Although lenders cannot know which borrowers are eligible for MI deductibility based on income or which borrowers itemize their tax returns, they must still report annual real estate tax and mortgage interest information.

Reporting Obligations: MI Companies/Lenders

26. How will the IRS monitor or audit the taking of a deduction for MI premiums? Will MI companies have to maintain analyses of the written and earned splits? The Treasury has the ability to require persons (or companies) receiving payments of mortgage insurance premiums to file reports with the IRS. See answer to #25. The premium written/earned distinction is not relevant in this context.


Feel free to contact me, Teri Treadway, with regards to your tax deductibility options when you are considering financing your next home or investment property. I can be reached during daytime at 832-379-0600, or my cell phone at 713-542-6646 or visit my website at www.teritreadway.com.

The information in this article was provided by: AIG United Guaranty Corporation and Subsidiaries, 230 North Elm Street, Greensboro, NC 27401, 800-334-8966 • www.ugcorp.com, A Member Company of American International Group, Inc., AIG United Guaranty is a marketing term for United Guaranty Corporation and its subsidiaries., AIG United Guaranty does not provide tax advice. Furthermore, AIG United Guaranty hereby informs you that (i) any tax statement contained herein is not intended and was not written to be used, and cannot be used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer; (ii) any such statement was written to support the promotion or marketing of materials contained herein; and (iii) borrowers should seek advise based on their circumstances from an independent tax advisor.

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