This article is meant to be an educational resource, for any tax advice, please consult a professional tax advisor.
Most of you are aware that there are tax breaks associated with home ownership. In fact, most people who own homes choose to itemize their taxes (instead of taking the standard option) for the very purpose of deducting the interest they pay on their mortgage and property taxes. However, there is now one more deduction you may be able to add to that list. If you are paying mortgage insurance, you may be able to also deduct that payment through the end of this year.
Mortgage insurance, whether private or through the Federal Government (as is the case with loans through the Federal Housing Administration or Department of Veterans Affairs), is a premium that you pay when you are unable to make a down payment of at least 20% of the home purchase price. This insurance is not the type that protects your home from natural disasters, but rather insurance that protects the lender in the case you default on your loan.
If you bought or refinanced your home after January 1st, 2007, you may be eligible to deduct these payments. This tax break was originally introduced in the Tax Relief and Health Care Act of 2006 and was only for those policies issued in 2007. However, the Protecting Americans from Tax Hikes (PATH) Act, passed in December 2015, extended this tax break for premiums paid through 2016. Any future years will reviewed by Congress.
In addition to the purchase date restrictions, there are a few a more considerations as listed below.
- Homeowners with Adjusted Gross Income (AGI) below $100,000 per year may deduct 100% of their annual mortgage insurance premiums
- Households with incomes over $100,000 and up to $109,000 are eligible for a reduced deduction
- The deduction is reduced by 10% for every $1,000 over the $100,000 AGI limit
- Second homes might also qualify (must be for personal use, not a rental)
- Must be for home acquisition debt, not for cash-out refinances or home equity loans
What Does This Mean for First Time Home Buyers?
Buyers that were interested in buying their first home with an FHA loan, now may be able to do so without the drawback of the mortgage insurance premium (MIP), since this is now tax deductible. This means they can take advantage of the numerous advantages an FHA loan has to offer such as down payments as low as 3.5% and lower closing costs. However, it is important to note that any future years of deduction have yet to be decided by Congress.