A campaign is about to get under way on Capitol Hill that could produce significant new tax savings for more than 10 million homeowners as early as this year.
The objective is reversal of an IRS policy that has vexed real estate tax experts for years: the agency's steadfast refusal to allow deductions for mortgage insurance premium payments, whether for private insurance or government-backed guaranty programs.
If successful, the upcoming campaign could open the door to millions of dollars of tax write-offs for homeowners. It could also lower the cost of homeownership for large numbers of first-time buyers -- the principal users of mortgage insurance programs.
Officials of the Mortgage Insurance Companies of America, the trade group that represents private home loan insurers, confirm that they are mounting an effort on the Hill to secure tax deductions for all forms of mortgage guaranty premiums -- including Federal Housing Administration (FHA), private insurance, veterans and rural housing loans.
More than 7 million homeowners have FHA-insured mortgages, and approximately 5.5 million pay private mortgage insurance premiums. Most of those, along with an unknown number of homeowners with Veterans Administration and Agriculture Department-backed rural housing loans, would be affected if Congress reverses the IRS policy. The sole limit would be income: The plan would not permit deductions for households with annual incomes of more than $100,000.
Private mortgage insurance (PMI) generally is required by lenders whenever a buyer's down payment is less than 20 percent of the purchase price of the house. Most consumers pay for the insurance as an added charge, typically $50 to $100 extra per month. The insurance covers a portion of a lender's losses in the event of a default by the borrower. Homeowners themselves receive no direct coverage from the insurance, even though they pay for it.
FHA, VA and USDA programs typically help families with moderate incomes and minimal down-payment-cash to buy a first home.
Though mortgage interest is tax-deductible, the IRS has prohibited write-offs of mortgage insurance on federal tax filings. It defines mortgage insurance as a "service" rendered in connection with obtaining a home loan. Other examples of nondeductible services include document preparation and appraisal fees.
Some prominent tax lawyers have disagreed with the IRS. They argue that mortgage insurance premiums fit all the key tests for deductibility established by the tax agency. They also point out that the IRS itself allows deductions of insurance premiums when they are paid through a slightly higher interest rate on a borrower's mortgage.
In a tax journal three years ago, New York lawyer Paul J. Housey laid out the legal case for deductibility, complete with citations of IRS rulings and tax court decisions. Housey maintained that mortgage insurance premiums meet statutory and IRS standards for treatment as "interest." They are "paid solely for the use . . . of money," they vary in amount based on the perceived risk of the loan, and they produce no specific "service" for the borrower, other than obtaining money from the lender, according to Housey.
The new campaign for deductibility by the mortgage insurers acknowledges these legal arguments, but also seeks to rally legislators to support "fair and equal treatment" of borrowers. On the one hand, say insurers, home buyers who can afford to make large down payments get to deduct all their mortgage interest. But first-time buyers and others who pay FHA or private mortgage insurance every month are barred from deducting those premiums, even though they function precisely like interest surcharges on top of their regular principal and interest payments.
"We strongly believe there should be parity" in the tax code treatment of home buyers who pay FHA or private mortgage insurance premiums vs. those who don't, said Jeffrey S. Lubar, a spokesman for the mortgage insurers.
"We also believe that this a way to increase homeownership opportunities for minorities, immigrants and other underserved groups" who could use the tax savings to help afford a first-time home purchase. A recent mortgage insurance industry-sponsored study of the issue concluded that upward of 100,000 additional families would be able to buy a first home if insurance premiums were tax-deductible.
Lubar said there is "bipartisan interest" on Capitol Hill to change the IRS policy, but he would not identify specific legislators.
What's the outlook for action this year? Uncertain at the moment. The insurers hope to rally other, more politically potent pro-homeownership lobbies to the cause. Two years ago, the 850,000-member National Association of Realtors came close to mounting a legislative drive on its own to secure tax-deductibility for mortgage insurance premiums, but it never moved forward.
This time around, if a coalition of consumer, mortgage and housing groups unites behind the insurers' campaign in the coming weeks, Congress just might listen.
Kenneth R. Harney's e-mail address is firstname.lastname@example.org.