PMI's Tax Deductible?

Mortgage Insurance Deductibility Bills To Get Big Push Before Election
Realty Times
Kenneth R. Harney
February 16, 2004

This could be the year that an estimated 10 to 12 million American homeowners get legal permission to start writing off their mortgage insurance premiums on their federal taxes.

But don't bet your house on it -- after all, Congress is involved and it's an election year. But proponents of mortgage insurance deductibility say they've got heavier-duty support than ever before, and they plan to push hard for legislation during the coming several months before the congressional and Presidential elections.

The Mortgage Insurance Fairness Act (H.R. 1336 and S 846) now has 161 bipartisan cosponsors in the House, and solid bipartisan support in the Senate. It also has an unusually broad-based coalition of business, labor and public interest groups rallying behind it, including the Financial Services Roundtable, the National Urban League, the Mortgage Bankers Association of America, the National Taxpayers Union, the Consumer Federation of America, the Fraternal Order of Police, and the National Education Association and the Teamsters.

The legislation would nullify a long-time IRS policy position that prohibits homeowners from taking write-offs of mortgage insurance payments on their federal taxes. The Mortgage Insurance Fairness Act would permit deductions of premiums for home loans with private mortgage insurance, Federal Housing Administration (FHA) insurance, VA (veterans guaranty coverage) and Rural Housing Service mortgages.

Proponents of deductibility say the IRS ban ignores the functional similarity of mortgage insurance premium payments with mortgage interest payments, which are generally fully deductible. The net result of the policy, they say, is that millions of first-time buyers, moderate income homeowners and other users of mortgage insurance pay hundreds of dollars more in federal taxes per year than they would if they could deduct their monthly loan premiums along with the interest.

Hector Flores, president of the League of United Latin American Citizens (LULAC), an outspoken advocate for deductibility, says the legislation would be especially important for minority groups who make heavy use of FHA and private mortgage insurance-assisted low downpayment loans to buy their first houses.

"Tax deductibility for mortgage financing has been a major reason the U.S. enjoys such a high rate of homeownership," he said. "But many Americans, especially those in minority communities, haven't been able to share in this aspect of the American dream."

The mortgage insurance industry estimates that 57 percent of all home purchase mortgages made to Hispanic and African American borrowers carry some form of mortgage insurance, private or governmental.

One of the prime sponsors of the legislation, Rep. Paul Ryan (R-Wis) argues that moderate income families, irrespective of race or ethnicity, will be the biggest beneficiaries of deductibility.

"The people who use mortgage insurance are policemen, firemen, teachers and veterans," yet under current IRS rules "they cannot deduct the cost of their premium payments for federal tax purposes," he said.

Mortgage insurance allows borrowers to take out a home loan with a minimal downpayment, frequently three to five percent. Private mortgage insurance is required by lenders on any loan where the downpayment is less than 20 percent. FHA mortgages are aimed at buyers who can afford even smaller downpayments and may have imperfect credit histories.

Most mortgage insurance premiums are paid monthly as add-ons to the principal, interest, insurance and tax escrows. They range in size from under $50 a month to $200 or more, depending on the size of the loan and depth of the insurance coverage.

Both the House and Senate bills "target" deductibility to middle and upper middle income families and deny it for high income homeowners. The bills contain a phase-out procedure limiting most tax write-offs to borrowers with household incomes below $100,000. Borrowers below that ceiling will be able to write off 100 percent of their monthly insurance premiums. Borrowers with incomes above $100,000 will lose 10 percent of their deduction for each $1,000 that their household income exceeds $100,000.
2004 Realty Times All Rights Reserved

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