MIP Mortgage Insurance Premium question

[nwtaxlady]

Client had a mortgage of $100,000 which is original acquisition debt. During the year they refinanced to pay off a bunch of credit card debt and other personal items. They took out $150,000. So now they have a new loan of $250,000 which consists of $100,000 acquisition debt and the rest is equity debt which is limited to $100,000.

So my question is. Now they have MIP. So is any of it deductible?

From what I have read, MIP is deductible for acquisition indebtedness for contracts issued after 2006. So in this scenario..... the clients $100,000 acquisition indebtedness is from prior to 2006.

My question is.... is any of the MIP deductible? Or just a percentage, due to not all of it is acquisition indebtedness?

Thanks...

[Snaggletooth]

Acquisition Debt

Before addressing MIP, I would like to focus on "acquisition debt", which may exceed the $100,000 existing loan.

Suppose these people originally borrowed $150,000 and during the time that followed, paid the loan down from $150,000 to $100,000. This would mean the acquisition debt (even though owed to a different lender) is $150,000. If the new loan is $250,000, then 60% of this is acquisition debt. (150/250).

If MIP is $1000, then applying the foregoing logic, then 60% of this amount ($600) is deductible, assuming their AGI does not phase them out.

[nwtaxlady]

For once I disagree with you Snaggletooth.

Once acquisition debt is paid down then its gone.... say if they paid off their house then there is no more acquisition debt. If paid off house and take out a loan against it say $75,000 to pay off credit cards (personal debt) then that is equity debt. UNLESS they use the money for improvements on the home.

So acquisition debt is the balance of the unpaid loan on acquiring the home (or money used on improvements).

So back to my question, you think prorating the MIP would be reasonable. With my figures in my original post. I would take 40% of the MIP. Because the acquisition debt is only $100,000. ($100,000/250,000=40%).

Anyone else would like to comment?

[TaxGuyBill]

I would take 40%.

[Maribeth]

Didn't you specify that the client's purchase of the property was before 2006?? If so, then none of the MIP is deductible.

[TaxGuyBill]

Didn't you specify that the client's purchase of the property was before 2006?? If so, then none of the MIP is deductible.

I doesn't matter when the purchase was made, it is when the Mortgage Insurance Contract was made.

§163(h)(3(E)(iii): "Clause (i) shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007."

https://www.law.cornell.edu/uscode/text/26/163#h_3_E

[Maribeth]

Thanks for the clarification. I was confused on that.

[Snaggletooth]

A rare disagreement

Once acquisition debt is paid down then its gone.... say if they paid off their house then there is no more acquisition debt.($100,000/250,000=40%).

Sooooo...you disagree? How dare you disagree with the foremost knowledgeable tax man in America?? I should strike you with lightning!!!

Seriously, lots of folks disagree, TaxLady, and are welcome to do so. Thanks for exercising your freedom to speak your mind.

If it helps any, many of the folks who disagree with me are often some of the best minds on the board. Especially that nasty character from Reno - The Slugg.

[nwtaxlady]

Thanks TAXGUYBILL! And Maribeth...I was confused too.

Thanks for clarifying that it is when the contract is issued and not original purchase date. Also taking a percentage of the MIP.

That was what I was going with but wanted to run this buy the forum to see what others thought. Sometimes I question myself and think... lets run this one by the forum to see if there is something I don't know!

I appreciate everyone on this forum for their input and help! Sometimes just reading text isn't clear to me or it can be interpreted differently.

The more I know what I don't know... the more I know!!