Private mortgage insurance (PMI) options & allowable deduction

[FEDUKE404]

This tax season I have already had two clients who bought a new primary residence during 2016. Neither person paid Private Mortgage Insurance (PMI) directly, e.g. through closing costs or via separate monetary payment. However, both clients DO have PMI now included with their mortgage.

Client A -- The amount of the PMI was added to the principal amount of the mortgage. The Form 1098 from the mortgage company shows an amount in Box 5. Within IRS limitations, I plan to deduct the PMI amount on Schedule A.

Client B -- The amount of the PMI was paid by the lender, otherwise known as "Lender-Paid Mortgage Insurance" or LPMI). The principal amount of the mortgage was unchanged, but a higher interest rate is being charged specifically due to the presence of the LPMI. There is no entry in Box 5 of the Form 1098. I do not plan to show any MPI payments on Schedule A.

Do you agree with these conclusions?

Separate issue: Both clients are pretty much "on top of things" but as relates to what actually went on with the PMI options. . .they are clueless. Who generally makes these types of decisions? The buyer? The seller? The realtor? The mortgage company? And having addressed those questions, what are the pros/cons of the two selections? Either way, the homeowner will face higher finance costs. (Of course, also a function of not having enough cash for a significant down payment.) My guess is it's a matter of qualifying for a loan of larger size with a lower interest rate OR qualifying for a loan of smaller size with a higher interest rate.

As for this event, Client A gets to itemize for 2016 and Client B does not, as both homes were bought in late summer (PMI for Client A helps to break the standard deduction).

Thanks for any input to clear up this fog.

FE

[Burke]

I agree with your conclusions. Frankly, I have never heard of a situation where the lender paid the PMI, but certainly have a problem with Client B's case, where the principal was not increased. At least in Client A's case, he will eventually have to pay it in order to pay off the loan.

[FEDUKE404]

LPMI issues

I agree with your conclusions. Frankly, I have never heard of a situation where the lender paid the PMI, but certainly have a problem with Client B's case, where the principal was not increased. At least in Client A's case, he will eventually have to pay it in order to pay off the loan.

You can Google "LPMI" and find some discussions. How common such is. . .I do not know.

It appears to be a case of the lender performing a case of CYA by paying for the PMI. When that happens, the borrower loses that potential deduction and the lender just raises the interest rate to compensate for the additional costs the lender incurred.

Weird situation. Still don't know if either Client A or Client B "had a choice" and/or had any of this sufficiently explained to them beforehand.

FE

[Burke]

I guess that makes sense, because I always heard that PMI was required by the bank/lender in order for the borrower to get a lower, preferred rate. I just never heard of a bank paying it for the borrower.

[FEDUKE404]

Addendum of the NC type

Just found out that NC does not allow PMI even if it is legitimately claimed on the 1040 Schedule A.

The "interest" total on Schedule A is reduced by the amount of PMI for NC tax purposes, if the client also itemizes on NC. (Many people do not itemize on NC.)

The things you can learn.

FE

[Snaggletooth]

The Federal Duke Answer

I wouldn't touch trying to deduct for Client B.

The amount deductible for Client A in 2016 is the total of:
1) The amount paid through escrow
2) The amortization of a lump-sum PMI on the closing statement charged to the buyer.
Cannot be deducted in whole, but is amortizable over 84 months.

And if client's AGI is over $100K, there is NO deduction whatsoever for PMI.

The NC treatment doesn't make sense, but as I don't practice there I won't comment.