Mortgage Insurance Tax-Deductible for Some Home Buyers
At a time of higher downpayment requirements and a more stringent mortgage lending environment, home builders should be reminding their prospective customers of tax savings that can lower the cost of buying a home, including the deductibility of mortgage insurance payments for some home buyers, according to Robert Dietz, NAHB’s director of tax issues.
The new tax deduction for payments of mortgage insurance was created by Congress in 2006 and is scheduled to expire at the end of 2010. Under this provision, premiums paid for qualified mortgage insurance for a principal residence or a secondary non-rental residence (but not for home equity loan debt) are tax-deductible for itemizing taxpayers who meet certain income requirements.
For example, a typical home buyer servicing mortgage insurance may spend about $600 to $1,200 per year. For a taxpayer in the 25% tax bracket, this deduction will reduce federal income taxes by $150 to $300 per year.
When combined with other tax incentives for homeownership — including the mortgage interest deduction, the property tax deduction and the first-time home buyer tax credit — the tax savings stemming from the purchase a home can be significant. NAHB estimates that a buyer with $90,000 in income, obtaining a $250,000 mortgage and claiming the first-time home buyer tax credit will save more than $27,000 in federal income tax during their first five years of homeownership.
Mortgages insured or guaranteed by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service or private insurers qualifies for the tax deduction.
The deduction is available for mortgage insurance contracts issued after Dec.31, 2006 and for mortgage insurance payments made before Jan.1, 2011.
Only mortgage insurance premiums allocable to a given period may be deducted, said Dietz. This means that deductions for prepaid mortgage insurance, which are allocable over the life of the insurance contract, must be allocated over several tax years. IRS Notice 2008-15 provides the rules for allocating private mortgage insurance and Veterans Affairs prepaid mortgage insurance payments over a 84-month period. Exceptions are available for VA and Rural Housing Service prepaid mortgage insurance.
The deduction for mortgage insurance is subject to an income phase-out. The amount allowable as a deduction is phased out for taxpayers with adjusted gross incomes in excess of $100,000 ($50,000 for a married taxpayer filing a separate return). Partial deductions are allowed for taxpayers with adjusted gross incomes between $100,000 and $110,000 ($50,000 and $55,000 for married taxpayers filing a separate return).
For more information, e-mail Rob Dietz at NAHB, or call him at 800-368-5242 x8285.
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