Deducting Mortgage Insurance Premiums as Mortgage Interest Deduction
Divorcing Homeowners often find themselves having less than a full 20% down payment when purchasing their new home. When a purchase loan in first lien position exceeds 80% loan to value, mortgage insurance may be put on the mortgage to protect the mortgage lender against potential loss in the future due to foreclosure, short sale, etc.
Can mortgage insurance premiums be deducted from income taxes as mortgage interest deduction?
You can treat amounts you paid during 2020 for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.
Qualified mortgage insurance.
Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998, as in effect on December 20, 2006).
Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. If provided by the Rural Housing Service, it is commonly known as a guarantee fee. The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. These fees can be deducted fully in 2020 if the mortgage insurance contract was issued in 2020. Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 5 of Form 1098.
Special rules for prepaid mortgage insurance.
Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.
Ryan purchased a home in May of 2020 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Since the $9,240 in private mortgage insurance is allocable to periods after 2020, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Ryan's adjusted gross income (AGI) for 2020 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2020. For 2021, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less.
In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months).
Limit on deduction.
If your adjusted gross income on Form 1040 or 1040-SR, line 8b, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. See line 8d in the Instructions for Schedule A (Form 1040 or 1040-SR) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums.
Source: IRS Publication 936
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
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