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Tax issues for mortgage loans

Mortgage and Lending with Mortgage Magic

With Christmas behind us and a new year just a few days away, like many, you may be starting to think about tax time.  In more than thirty five years in lending, I've heard thousands of questions regarding tax issues associated with home ownership and mortgage loans.  I always recommend the advice of a tax professional, but most people know that, usually, the mortgage interest and property taxes a homeowner pays each year are deductible.  Additionally, loan origination fees for a real estate purchase are usually deductible for the tax year in which the purchase was made.  Of course there are differences for refinances and limits on equity withdrawals.  As for the tax issues involved with a 1031 exchange, that's almost always a subject best left to a tax professional.

This year there was an interesting change regarding home associated tax deductions.  On December 20, 2006, President Bush signed into law, HR Bill 6111 which, upon enactment, became Public Law Number 109-532.  In that bill, among a bunch of other items, Section 419 amended section 605014 of the IRS Code of 1986 and, to paraphrase the verbiage, it stated that PMI premiums, paid or accrued for a qualified residence, would be treated like qualified mortgage interest.  In other words, in most cases, it would be deductible for federal income tax purposes.  Recently having read a fair amount of commentary regarding this modification, there appear to be some interesting details.  Rather than providing a long-term deduction for anyone paying PMI premiums. it seems that it applies only to those homeowners who purchased their home in 2007.  In other words, if you, or your client, closed on December 31, 2006 and have a loan with PMI, you can't deduct the premium.  Additionally, it appears that, unless some type of extension is granted, the deduction is only good for 2007.  So, if you bought your home in 2007, even if you keep the same loan for a few years after 2007, you can only deduct the premiums for 2007 and with no deduction in any future years. 

As an addition to the modification, there are income limits.  The base is $100,000 annual income for a married couple and $50,000 for a single person.  At, or below, these income limits, the premium for 2007 is fully deductible.  For each additional $1,000 in annual income ove $100,000 for a married couple and for each $500 additional over $50,000 for a single person, the deduction drops by ten percent of the premium.  As a result, at incomes of $110,000 for a married couple and $55,000 for a single person, there is no deduction allowed.

It remains to be seen if any additional legislative action will be taken to either extend or again change the current limits.  The 2006 law appeared to provide, for the first time, a make-sense, meaningful change to the tax treatment of mortgage debt.  As it now stands, rather than providing a long term enhancement primarily for first time home buyers, it appears to be limited to only a few tax payers.  In states like here in California where it is not deductible for state tax purposes anyway, with such short-lived benefit it seems to be almost inconsequential for many of the few for which it might be applicable.