Should millions of American homeowners’ mortgage insurance premiums be deductible on their federal income tax returns?
Should borrowers taking out new mortgages with Federal Housing Administration (FHA), Veterans (VA) guaranty, private mortgage insurance or US Dept. of Agriculture-backed rural housing backing be able to treat their premiums as interest, and write them off?
A new lobbying effort is underway on Capitol Hill that would do precisely that. It would force the Internal Revenue Service to reverse its long-standing prohibition of deductions of monthly PMI and FHA insurance premiums. In the process, say supporters, it would cut taxes for over 10 million homeowning households and stimulate an additional 300,000 new home purchases per year.
The campaign is being run by the Mortgage Insurance Companies of America, the Washington DC-based trade group that represents private mortgage insurers. Some prominent tax lawyers have argued for years that IRS’s ban on deductions not only is incorrect but inherently self-contradictory. IRS permits writeoffs of “lender-paid” mortgage insurance premiums--where the lender pays the insurance but raises the interest rate on the note paid by the borrower. Yet it considers the same insurance coverage to be a loan-related “service”--like an appraisal --when borrowers directly pay for the coverage as part of their monthly escrows.
Several years ago, New York tax lawyer Paul J. Housey criticized the IRS’s position in a widely-circulated tax professional journal. He argued that mortgage insurance premiums function like interest, and meet all the IRS’s regulatory tests for treatment as deductible interest. The premiums are “paid solely for the use of money,” wrote Housey, they vary in amount based on the anticipated credit risk of the borrower, and they produce no tangible “services” for the borrower other than helping to obtain money from the lender.
If successful in convincing Congress to amend the tax code on home loan insurance deductions, large numbers of borrowers would find their after-tax costs of homeownership lower than they are today. Roughly 7 million borrowers currently pay FHA premiums, and 5.5 million pay private mortgage insurance. A private study conducted by one insurance company estimates that the monthly savings from mortgage insurance deductions would be enough to permit about 300,000 currently marginal home buying prospects to afford a mortgage on a first home.
That in turn would create substantial new opportunities for Realtors, builders and others working with such prospects. The insurance industry’s proposals include an income limit to ensure the beneficiaries are primarily moderate income households. It would prohibit mortgage insurance writeoffs by households with incomes above $100,000. But the vast majority of home buyers who use FHA or private MI have incomes well below that threshold, according to industry data. Premium costs run anywhere from $50 a month on smaller mortgages to $150 and more on larger loans.
Jeffrey S. Lubar, spokesman for the mortgage insurers, says the new campaign is designed to eliminate the current unfairness in the tax system. On the one hand, he says, people who can afford downpayments of 20 percent or more get to deduct all of their monthly interest payments. In contrast, moderate income famileis who can only afford low downpayment mortgages are prohibited from writing off the thousands of dollars in insurance premiums they pay per year.
“We strongly believe there should be parity” in the tax code, said Lubar in an interview with RealtyTimes. “We also believe that this is a way to increase homeownership opportunities” for minorities, immigrants and other underserved groups who could use the tax reduction to help swing a first-time home purchase.
More on this developing issue in upcoming reports.