If you obtain a new home loan with private mortgage insurance in 2007, you might be able to deduct the cost of the insurance on your 2007 federal income tax return. The rules are just as complicated as most other tax laws, so you should consult a qualified tax professional for guidance on your individual situation.
What is PMI?Private mortgage insurance (PMI) protects the lender from the risk that you might default on your home loan. As the borrower, you pay the PMI premiums. PMI is purchased through a private company, unlike government-related mortgage insurance, which is obtained though an agency such as the Federal Housing Administration. Lenders generally require mortgage insurance if your down payment or existing equity is less than 20 percent of the appraised value of your home.
Who benefits from tax deduction?If you and your spouse file a joint tax return and have adjusted gross income (AGI) of no more than $100,000 or if you file an individual tax return and have AGI of no more than $50,000, you may be able to deduct 100 percent of the PMI you paid in 2007. You'll need to itemize your tax deductions to take advantage of this benefit.
There is no cap on the amount of paid PMI that you can deduct; however, the deduction is reduced by 10 percent for each additional $1,000 of AGI. That means if you and your spouse file a joint tax return and have AGI of $100,000 to $110,000 or if you file an individual return and have AGI of $50,000 to $55,000, you may be able to take a partial deduction.
The deduction is allowed for both purchase-money and refinance mortgages, but there is a gray area as to whether PMI paid for the cash-out portion of a refinance would be deductible. If you obtain a refinance loan with cash out and PMI in 2007, you'll need to consult a tax professional for advice.
Your lender or loan servicer might report the annual amount of PMI you paid to you on the same year-end form that's used to report annual mortgage interest or another form. This report is required only if the total PMI is more than $600.
Rethink piggyback or PMI equationThe PMI deduction is allowed only for mortgages that close between Jan. 1 and Dec. 31, 2007, and is effective only for the 2007 tax year, unless the federal government renews the law for subsequent years.
This limited duration complicates the question of whether a single mortgage with PMI may be more preferable than two mortgages in a "piggyback" structure.
If the PMI deduction isn't extended, you may still benefit from the two-loan option, or if you want to bank on the odds that the deduction will be extended, you may want to factor that expectation into your decision.
Either way, individual circumstances such as how long you plan to keep your mortgage and own your home, your ability to qualify for two loans, the purpose and type of your second loan, and your personal tolerance for risk, among other factors, may be more important than the tax benefit of the PMI deduction. Be sure to weigh all of the relevant factors before you make your decision.