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Kies Suggests Guidance on Tax Provision Under Tax Relief and Health Care Act

FEB. 28, 2007

Kies Suggests Guidance on Tax Provision Under Tax Relief and Health Care Act

DATED FEB. 28, 2007
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February 28, 2007

 

 

Honorable Eric Solomon

 

Assistant Secretary (Tax Policy)

 

Department of the Treasury 1500

 

Pennsylvania Ave., NW

 

Washington, DC 20220

 

 

Dear Mr. Solomon:

The Tax Relief and Health Care Act of 2006 (Pub. L. 109-432) includes a provision (section 419 of the Act) that treats premiums paid or accrued for qualified mortgage insurance as deductible interest for tax purposes. The provision is effective with respect to mortgage insurance contracts issued after December 31, 2006, and thus applies to the current tax year. Accordingly, we believe that it is important that the Treasury Department and the IRS publish guidance on the provision as soon as possible.

On behalf of the Mortgage Insurance Companies of America, we are submitting with this letter a draft of possible guidance (in Q & A form) that the Treasury Department and the IRS might use in promulgating guidance.

We have also provided a copy of this draft guidance to Lewis Fernandez, IRS Associate Chief Counsel, Income Tax and Accounting. We would be pleased to meet with you and whatever team you believe is appropriate to discuss this draft guidance and to answer any questions you may have. I will call your office to follow up on this. In the meantime, please do not hesitate to call me at (202) 772-2482 if you have any questions.

Sincerely

 

 

Kenneth J. Kies

 

Managing Director

 

Clark Consulting

 

Washington, D.C.

 

cc:

 

Michael Desmond, Tax Legislative Counsel (Department of the Treasury)

 

 

Lewis Fernandez, Associate Chief Counsel, Income Tax and Accounting

 

(IRS)

 

 

Suzanne Hutchinson, Mortgage Insurance Companies of America

 

 

Notice 2007-xxx

I. PURPOSE

The Treasury Department and the Internal Revenue Service are providing initial guidance relating to the new deduction for premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year. This initial guidance uses a question-and-answer format to provide timely answers to the most important issues relating to the new deduction. It is expected that additional guidance will follow.

II. BACKGROUND

The Tax Relief and Health Care Act of 2006 (Pub. L. 109-432) (the "Act") includes a provision (section 419 of the Act) that treats premiums paid or accrued for qualified mortgage insurance in connection with acquisition indebtedness on a qualified residence of the taxpayer as interest that is qualified residence interest and thus deductible. The amount allowable as a deduction under the provision is phased out ratably by 10 percent for each $ 1,000 by which the taxpayer's adjusted gross income exceeds $100,000.

For this purpose, qualified mortgage insurance means mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (defined in section 2 of the Homeowners Protection Act of 1998 as in effect on date of enactment of the provision).

Amounts paid for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year are treated as paid in the period to which they are allocated. No deduction is allowed for any unamortized balance of a mortgage insurance premium if the mortgage is paid before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration).

The provision does not apply with respect to any mortgage insurance contract issued before January 1, 2007. The provision also does not apply to any amount paid or accrued after December 31, 2007, or properly allocable to any period after that date.

The Secretary is authorized to issue regulations requiring any person receiving payments of mortgage insurance premiums aggregating $600 or more for any calendar year to file an information return with the Internal Revenue Service and to provide a copy of such return to the individual making such payment.

III. QUESTIONS AND ANSWERS

Effective Date

Q-1 For purposes of the effective date of the provision, what is considered the date of contract issuance?

A-1 The date of contract issuance is the mortgage loan closing date. Only loans closing on or after January 1, 2007 qualify under the provision.

Qualified Mortgages

Q-2 Is the deduction allowed in the case of refinancings?

A-2 Yes. Under the provision, mortgage insurance premiums paid in connection with "acquisition indebtedness" are treated as deductible qualified residence interest under section 163(h)(3). Under section 163(h)(3)(B), acquisition indebtedness is defined to include a refinancing of the existing indebtedness up to the amount of the refinanced indebtedness. Accordingly, mortgage insurance premiums paid in connection with a refinancing are eligible for the deduction.

Q-3 Is the deduction allowed in the case of second homes?

A-3 Yes. The deduction is available with respect to a "qualified residence" of the taxpayer. The term "qualified residence" is defined under section 163(h)(4)(A) to mean the taxpayer's principal residence and one other residence of the taxpayer selected for these purposes.

Q-4 Is the deduction available in the case of multi-unit properties?

A-4 Yes. If one or more of the units is the taxpayer's principal residence or another residence of the taxpayer selected for these purposes, the portion of the premiums paid on those units is deductible.

Reporting

Q-5 For purpose of any reporting requirements, who is the "person receiving payments of mortgage insurance premiums"?

A-5 In the event that the Secretary requires information reporting, the loan servicer will be the person subject to the reporting requirement. The reporting provision under the legislation is made part of the current-law mortgage interest reporting requirements under section 6050H. Under the regulations implementing that provision, the interest recipient (who is required to report) is generally the loan servicer (Treas. Reg. Sec. 6050H-1(c)(2)).

Deductible amount

Q-6 In the case of a single premium mortgage insurance payment (i.e., a premium that prepays coverage for all periods until cancellation of the insurance), how much of the premium payment should be allocated to the current year?

A-6 Generally, the provision requires that amounts paid for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year are to be treated as paid in the period to which they are allocable. Thus, a prepayment for qualified mortgage insurance must be amortized over the life of the mortgage insurance contract. It is understood that the length of the average mortgage insurance contract is eight years. As a safe harbor allocation rule, taxpayers may utilize a contract life of eight years in amortizing prepayments of qualified mortgage insurance premiums.

For example, in the case of a mortgage insurance contract issued on July 1, 2007, for which a single premium of $4,000 is paid on that date, half of 1/8 of the total premium amount, or $250, would be allocated to 2007.

Q-7 How should taxpayers treat a refund of mortgage insurance premiums?

A-7 If the refund is for premiums that have not been deducted, as would generally be the case because the provision requires prepaid amounts to be amortized, the refund would not be taxable income to the taxpayer.

Seller Concessions

Q-8 Is the deduction available where the home seller pays mortgage insurance premiums on behalf of the taxpayer?

A-8 Yes. A concession by the home seller to pay mortgage insurance premiums at closing is a purchase price adjustment analogous to points paid by the seller at closing. Under current law, points paid by the seller are deductible by the buyer generally ratably (with some exceptions) over the life of the loan. Similarly, mortgage insurance premiums paid by the seller are deductible by the buyer ratably over the life of the mortgage insurance contract (8 years as discussed in Question-and-Answer #6).

IV. EFFECTIVE DATE

This Notice is effective January 1, 2007 and until further, more detailed guidance is published.

V. REQUEST FOR COMMENTS

Comments regarding the issues addressed by this Notice and other issues under section 419 of the Act are requested. Written comments should be submitted by ____, 2007. Send submission to ______. Comments may also be hand delivered Monday through Friday between the hours of 8:30 a.m. and 4:00 p.m. to the Internal Revenue Service, _______ (Notice 2007-___), Courier's Desk, Internal Revenue Service, 1111 Constitution Ave. N.W., Washington, D.C. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007-___). All comments will be available for public inspection.

VI DRAFTING INFORMATION

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