In a time of bad mortgage news, there's a bright spot or two for homeowners: Foreclosure comes with a tax break, and 2007 mortgage-insurance...
WASHINGTON — In a time of bad mortgage news, there’s a bright spot or two for homeowners: Foreclosure comes with a tax break, and 2007 mortgage-insurance payments may be tax-deductible.
Congress acted on both provisions late last year, extending the mortgage-insurance deduction for three more years and creating a new tax break for homeowners facing foreclosure.
The mortgage-insurance deduction will help certain low and moderate-income homeowners, especially first-time homebuyers and those struggling with higher house payments as adjustable-rate mortgages reset.
Mortgage insurance is required by government and private lenders on home purchases in which the buyer makes a down payment of less than 20 percent.
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For the first nine months of 2007, about 16.7 percent of the estimated $1.98 trillion in new mortgages originating during that period had private mortgage insurance (commonly known as PMI) or government mortgage insurance, according to Inside Mortgage Finance Publications, which researches and tracks the residential mortgage business.
Typically, homeowners pay an average of $50 to $100 a month in mortgage insurance on a median single family home price of $217,600, according to the Mortgage Insurance Companies of America (MICA), a trade association.
The new tax deduction could save taxpayers who itemize as much as $300 to $350 in federal taxes, MICA estimates.
There are restrictions. Only taxpayers with adjusted gross incomes of $100,000 or less can take the full deduction, which gradually decreases for incomes above that and is eliminated altogether for those with AGIs over $109,000.
And only insurance on mortgages taken out in 2007 — new or refinanced — qualifies for the deduction. If you simply continued paying mortgage insurance in 2007 on a loan taken out in an earlier year, you cannot deduct those payments.
To be deductible, the insurance must have been paid on “home-acquisition debt” — debt incurred to buy, build or substantially improve a principal residence or second home.
Most tax experts interpret this provision as meaning that if in 2007 you refinanced your home to take out extra cash from your equity — then used that cash toward building a home addition or making a substantial home improvement — insurance on that added mortgage debt is deductible along with insurance on the old mortgage amount.
But if you simply refinanced your home to take out extra cash for other purposes, the portion of a mortgage-insurance premium that covers that additional amount isn’t deductible, only the amount that covers the original mortgage debt.
Late last year, Congress approved a measure to help homeowners fighting foreclosure as the mortgage crisis took its toll. Taxpayers who were granted forgiveness of mortgage debt in 2007 don’t have to pay taxes on the amount of that forgiveness, up to $2 million ($1 million for a married person filing a separate return). Only debt forgiveness on a principal residence is eligible.
The provision applies to restructured mortgage agreements after Jan. 1, 2007. Previously, such loan forgiveness was often taxed as income.
Several other common tax benefits are in effect for homeowners who itemize. They include:
• Mortgage-interest deduction: Interest you paid to the lender in 2007 on mortgages for your principal home and a second home for your personal use, providing the mortgages are secured by the home.
• Points: Certain fees, computed as a percentage of the loan amount, that you paid to obtain your mortgage; for second homes, these must be amortized over the life of the loan. (There are nine tests, spelled out in Publication 936.)
• Refinancings: Points paid for refinancing are usually not deductible in full during the year you refinance, but are instead amortized over the life of the loan. But if you refinanced in 2007 and used part of the refinancing proceeds to substantially improve your home, you can deduct in full the points on that part of the loan; the remaining points are amortized.