Divorcing homeowners often find themselves without a full 20% down payment when purchasing a new home. When a purchase loan exceeds 80% loan-to-value (LTV), mortgage insurance may be required to protect the lender against potential losses from foreclosure, short sale, etc.
Can Mortgage Insurance Premiums Be Deducted as Mortgage Interest?
Yes, you can treat amounts paid for qualified mortgage insurance in 2020 as a home mortgage interest deduction. The insurance must be connected to home acquisition debt, and the insurance contract must have been issued after 2006.
Qualified Mortgage Insurance
Qualified mortgage insurance includes insurance provided by:
- The Department of Veterans Affairs (VA)
- The Federal Housing Administration (FHA)
- The Rural Housing Service (RHS)
- Private mortgage insurance (PMI) as defined in section 2 of the Homeowners Protection Act of 1998 (as of December 20, 2006).
Mortgage insurance from the VA is known as a funding fee, and from the RHS, it is known as a guarantee fee. These fees can be included in the loan amount or paid at closing and can be fully deducted in 2020 if the contract was issued in 2020. Contact your mortgage insurance issuer for the deductible amount if not reported in box 5 of Form 1098.
Special Rules for Prepaid Mortgage Insurance
Generally, premiums for qualified mortgage insurance that are allocable to periods after the tax year’s close must be treated as paid in the period to which they are allocated. Allocate premiums over the shorter of the mortgage's term or 84 months, starting with the insurance acquisition month. No deduction is allowed for the unamortized balance if the mortgage is paid off early. This rule does not apply to VA or RHS mortgage insurance.
Example:
Ryan purchased a home in May 2020 with a 15-year mortgage and prepaid $9,240 in PMI at closing. This amount must be allocated over 84 months (since 84 months is shorter than the 180-month mortgage term). With an adjusted gross income (AGI) of $76,000 in 2020, Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for 2020 and $1,320 ($9,240 ÷ 84 x 12 months) in 2021 if his AGI is $100,000 or less.
Limit on Deduction
If your AGI on Form 1040 or 1040-SR, line 8b, exceeds $100,000 ($50,000 for married filing separately), the deductible amount of mortgage insurance premiums is reduced or eliminated. Refer to the Instructions for Schedule A (Form 1040 or 1040-SR) and complete the Mortgage Insurance Premiums Deduction Worksheet. If your AGI exceeds $109,000 ($54,500 if married filing separately), you cannot deduct mortgage insurance premiums.
Source: IRS Publication 936
Consult a Certified Divorce Lending Professional (CDLP®)
Always work with a Certified Divorce Lending Professional (CDLP®) when dealing with divorce and real estate or mortgage financing. Their expertise ensures you navigate the complexities effectively.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association
