A New Tax Deduction for Home Buyers

Home buyers who purchase in 2007 or later can deduct Mortgage Insurance Fees When Preparing Their Tax Returns. Mortgage insurance is NOT deductible for borrowers who purchased before 2007.

Mortgage insurance is charged to buyers who purchase homes with less than a 20 percent down payment, a route used by most homebuyers. Because of the extra risk to the lender from the small equity of the borrowers, lenders want the borrower to buy an insurance policy to protect the lender in case of loss from foreclosure.

The insurance policy is paid for by the buyer, usually in the form of a monthly fee. A typical monthly fee might be $75, or $9,000 annually. A taxpayer in the 25 percent tax bracket might realize a little over $2,000 in tax savings, a welcome relief from the tax man.

The new law has the following provisions:

• The deduction is for a “qualified residence” not yet defined, so it might also be applied to a second home, but check it out at tax time.
• The write-off is fully deductible to married taxpayers filing jointly who have adjusted gross income of $100,000 or less, but phases out quickly after the income goes over that. It drops ten percent for each $1,000 over $100,000 in income, so if you made $107,000 last year, you'd get only 30 percent of the deduction. Single filers get full deductibility up to $50,000, losing ten percent of the deduction for each $500 over the $50,000.
• No write-off is available for refinancing.
• Mortgage lenders must send a statement at year-end if the mortgage insurance is $600 or more.

The legislation expires on December 31, 2007, but may be extended to become permanent.