Two Changes in Tax Code May Benefit Some Homeowners

There are two small changes in the tax code this year that may benefit some homeowners. If you think you qualify for these changes, research the guidelines at www.irs.gov or contact your tax advisor.

The first change is actually an extension. In late 2006 Congress passed a law allowing a rather strange one-year deduction of premiums for private mortgage insurance (PMI). This was a scrap thrown to PMI insurers who had been complaining that their businesses were suffering from the number of homeowners opting for piggyback mortgages. These simultaneous second mortgages were used for a house down payment, eliminating the need for PMI and providing an additional mortgage interest deduction.

This deduction required that the policy be taken out and paid for in 2006 (tough luck for homeowners struggling with premiums from earlier years,) was for home acquisition not refinancing, and the deduction was available for 2006 only. Now this deduction has been extended for 2007 provided that the PMI contract was entered into in 2006 or 2007 and that payments for the more recent year were made before 2008. PMI premiums are treated as mortgage interest on Schedule A so taxpayers must itemize in order to claim the deduction and the taxpayer’s gross income must be under $50,000 for an individual or $100,000 for a couple filing jointly. A portion of this deduction may be available for higher earners; again, consult the regulations or your tax advisor.

Homeowners whose homes were foreclosed in the last year or who gave a deed in lieu of foreclosure or had a short sale approved by their lender have been granted a new benefit by Congress.

In the past, when taxpayers ended up paying less than the total amount due on their mortgage, the lender was required to issue a form, similar to a 1099, for a cancellation of indebtedness income. Thus, a debtor who had lost his home might find himself facing taxes on thousands of dollars in forgiven debt if the house failed to fully repay the mortgage at auction.

Under The Mortgage Forgiveness Debt Relief Act of 2007, up to $2 million of the cancelled debt on a principal mortgage is now tax free. The new law does not apply to investment property.