Mortgage Interest paid on first and second mortgages are tax deductible for primary and second homes. The deductions are only allowed for mortgages up to $1,000,000 in acquisition debt and $100,000 in home equity debt (aka. cash out refinances). Note: these limits are halved if you’re married filing separately. “Acquisition Debt” is considered any mortgage debt that is not a home equity loan – meaning a loan that was refinanced is still considered “acquisition debt” so long as no equity was taken out of the home.

Requirements For Deductions

The following three conditions must be meet to deduct mortgage interest:

  1. The taxpayer must occupy the home as their primary resident or second home
  2. The taxpayer must be on the note (i.e. legally obligated to pay the debt)
  3. The taxpayer must actually make the payments.
  4. Examples
  5. Primary / 2nd Home: If a co-signer of a note (like a mom or dad) makes the payments but doesn’t live in the property, they cannot write off the interest paid.
  6. Must Be On Loan: a roommate that pays half the mortgage is not entitled to the deductions since they are not on the original loan.
  7. Must Make The Payments: let’s say you have amazing parents and they pay your mortgage, you are unable to deduct the interest since you’re not making the payments.

Deduction Calculator

In order to realize the tax deductions from mortgage interest paid you’ll have to itemize your tax deductions in the Schedule A when you file your taxes. Moreover, the aggregate of your deductions must exceed the standard deduction for the year. (For 2015 the standard deduction is $6,300 for someone file as a Single and $12,600 for Married Filing Jointly). This calculator will determine your annual savings in taxes paid.

Note: this calculator does not work on mobile or tablet devices.

Second Homes

You are allowed to deduct mortgage interest on one primary residence and one second home. If you have a second home that you rent out for part of the year, you must use it for more than 14 days or more than 10% of the number of days you rented it out at fair market value (whichever number of days is larger) to be able to deduct the mortgage interest.

If you use the home you rent out for fewer than these required number of days, your home is considered a rental property and not a second home. You may treat a different home as your second home each tax year, provided each home meets the qualifications noted above.

Construction Loans

Mortgage interest paid on an interim construction loan is tax deductible so long as construction was completed within 24 months and the home was occupied within 90 days after its completion.

Forms and Records

If you paid more than $600 in mortgage interest in a year, a mortgage servicer is required to send you a form called “1098: Mortgage Interest Statement”. Form 1098 is the statement your lender sends you to let you know how much mortgage interest you paid during the year and, if you purchased your home in the current year, any deductible points you paid since Mortgage Points Are Tax Deductible. Your closing statement (called the HUD-1 Settlement Statement or Closing Disclosure) will also show any per diem interest paid as well as any points and mortgage insurance that may have been paid.

Mortgage Insurance Tax Deductions

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Mortgage Insurance (MI) can be tax deductible but unlike Mortgage Interest Tax Deductions, MI deductions are dependent on the household’s adjusted gross income. Note: Mortgage Insurance should not be confused with Homeowner’s Insurance or with any life insurance products. MI is insurance that protect the lender, not the homeowner.

There are various Types of Mortgage Insurance – such as monthly MI, single paid MI, and split premiums – and all MI types are eligible for the tax deduction with two exceptions: 1) MI paid on investment properties, and 2) MI paid on cash-out refinances transaction. Borrower-paid Mortgage Insurance that was acquired in 2007 or later can be tax deductible through 2016 on all loan program types secured by a primary residences and/or second home. This deduction is available is for all purchase and refinance loans but there is a catch: there are income restrictions.-

INCOME RESTRICTIONS

The MI tax deduction is based on a household’s Adjusted Gross Income (line 38 on the 1040 tax return) and the MI deduction is allowed if your Adjusted Gross Income (AGI) does not exceed $109,000. The PMI deduction begins to phase out once your AGI surpasses $100,000 (or $50,000 for married couples filing separately) and is removed completely with an AGI more than $109,000 (or $54,500 for married couples filing separately).

Example: if household AGI is $101,000 then 90% of the MI is deductible; if the AGI is $102,000 then 80% is deductible; etc..

If your AGI ranges between $100,000 and $109,000, you can use a worksheet included with Schedule A of your income tax form to determine how much you can deduct from your taxes. Borrowers with an AGI less than $100,000 can deduct 100% of the PMI premiums.

Note: if you own the property jointly, or if another person paid a portion of the insurance premiums, you can claim only the amount that you paid.

Government Loans

FHA, VA, and USDA loans all have “mortgage insurance” that can be fully deducted in the year the loan was originated. FHA has an Up Front MIP (and Monthly MIP), VA has a Funding Fee, and USDA has a Guarantee Fee and all are allowed to be fully deducted in the year paid – even if they were rolled into the loan.

Conventional Single Paid MI

For conventional loans that included a Single-Paid MI premium, that amount must be deducted over 84 months (or the life of the loan – whichever is shorter). The catch is that each year the borrower’s income must still meet the requirements for each year of the deduction.

Example: Ryan purchased a home in May of 2012 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 2012, 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 2012 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. For 2013, 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).

IRS Tax Code

For those of you that can’t sleep, here are the details on why you can deduct the MI. #Boring. In 2007 deducting your MI was allowed through the Tax Relief and Health Care Act; however, because the housing market had been slow to recover from the 2008 housing crisis, the tax break had been extended through to 2013. On December 19, 2014, legislation in the form of the Tax Increase Prevention Act was passed by Congress to continue to allow PMI tax breaks for qualified borrowers for that year. And finally, thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH), Borrower-paid Mortgage Insurance that was acquired in 2007 or later can be tax deductible for 2015 and 2016. Visit IRS Publication 936 for more details relating to mortgage interest tax deductions.

MORTGAGE INSURANCE TAX DEDUCTION

Like the Mortgage Interest Tax Deduction, borrower-paid Mortgage Insurance that was acquired after 2006 can be tax deductible for 2013 on all loan program types secured by a primary residences and/or second home so long as the borrower meets certain income restrictions. There are various types of Mortgage Insurance options – such as monthly MI, single paid MI, and split premiums – and all MI types are eligible for the tax deduction. Check out our page on Mortgage Insurance for more details on the various types of MI. MI paid on investment properties and MI paid on cash-out refinances transaction are NOT tax deductible.

GOVERNMENT LOANS: FHA, VA, and USDA loans all have “mortgage insurance” that can be fully deducted in the year the loan was originated. FHA has an Up Front MIP (and Monthly MIP), VA has a Funding Fee, and USDA has a Guarantee Fee and all are allowed to be fully deducted in the year paid – even if they were rolled into the loan.

INCOME RESTRICTIONS

The MI tax deduction is based on a household’s Adjusted Gross Income (line 38 on the 1040 tax return) and does phase out after certain thresholds. The chart below outlines the income limitations and the percentage of MI that can be deducted.

SINGLE PAID MI

For conventional loans that included a Single-Paid MI premium, that amount must be deducted over 84 months (or the life of the loan – whichever is shorter). The catch is that each year the borrower’s income must still meet the requirements for each year of the deduction.

Example. Ryan purchased a home in May of 2012 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 2012, 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 2012 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. For 2013, 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).

Please consult your tax professional for tax advice regarding Mortgage Insurance Tax Deductions.

 
Mark

Mark Pfeiffer

Branch Manager
Loan Officer, NMLS # 729612
972.829.8639
mpfeiffer@homebridge.com

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