Federal Register: May 7, 2009 (Volume 74, Number 87)
DOCID: fr07my09-7 FR Doc E9-10662
DEPARTMENT OF THE TREASURY
Internal Revenue Service
CFR Citation: 26 CFR Part 1
RIN ID: RIN 1545-BH84
TD ID: [TD 9449]
NOTICE: RULES
DOCID: fr07my09-7
DOCUMENT ACTION: Temporary regulations.
SUBJECT CATEGORY:
Allocation and Reporting of Mortgage Insurance Premiums
DATES: Effective Date: These regulations are effective on May 7, 2009.
Applicability Dates: For dates of applicability, see Sec. Sec. 1.16311T(d) and 1.6050H3T(e).
DOCUMENT SUMMARY:
This document contains temporary regulations that explain how to allocate prepaid qualified mortgage insurance premiums to determine the amount of the prepaid premium that is treated as qualified residence interest each taxable year under section 163(h)(4)(F) of the Internal Revenue Code (Code). The temporary regulations also provide guidance to reporting entities receiving premiums, including prepaid premiums, for mortgage insurance. The temporary regulations reflect changes to the law made by the Tax Relief and Health Care Act of 2006 and the Mortgage Forgiveness Debt Relief Act of 2007. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.
SUMMARY:
Allocation and Reporting of Mortgage Insurance Premiums
SUPPLEMENTAL INFORMATION
Background
Section 419 of the Tax Relief and Health Care Act of 2006, Public Law 109432 (120 Stat. 2967) (2006 Act), added sections 163(h)(3)(E), (h)(4)(E), and (h)(4)(F) to the Code. Section 3 of the Mortgage Forgiveness Debt Relief Act of 2007, Public Law 110142 (121 Stat. 1803) (2007), amended section 163(h)(3)(E)(iv). In general, these new provisions treat certain qualified mortgage insurance premiums as qualified residence interest. This treatment applies only to certain qualified mortgage insurance premiums paid or accrued on or after January 1, 2007, and on or before December 31, 2010, on mortgage insurance contracts issued on or after January 1, 2007.
Section 163(h)(3)(E)(i) provides that premiums paid or accrued for
qualified mortgage insurance in connection with acquisition
indebtedness for a qualified residence are treated as qualified
residence interest for purposes of section 163. Section 163(h)(4)(E)
defines qualified mortgage insurance as (i) mortgage insurance provided
by the Veterans Administration (VA), the Federal Housing Administration
(FHA), or the Rural Housing Administration (Rural Housing),\1\ and (ii)
private mortgage insurance (as defined by section 2 of the Homeowners
Protection Act of 1998 (12 U.S.C. 4901) as in effect on December 20, 2006). The amount
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treated as qualified residence interest may be reduced or eliminated
under section 163(h)(3)(E)(ii), which provides that the amount allowed
as a deduction is phased out ratably by 10 percent for each $1,000
($500 in the case of a married individual filing a separate return)
that the taxpayer's adjusted gross income exceeds $100,000 ($50,000 in
the case of a married individual filing a separate return).
\1\ References in section 163(h)(4)(E)(i) to the Veterans
Administration and Rural Housing Administration are interpreted to
mean their respective successors, the Department of Veterans Affairs and Rural Housing Service.
Section 163(h)(4)(F) states that any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which the amount is paid shall be chargeable to capital account and shall be treated as paid in the periods to which the amount is allocated. No deduction shall be allowed for the unamortized balance of the account if the mortgage is satisfied before the end of its term. The allocation rules in section 163(h)(4)(F) do not apply to amounts paid for qualified mortgage insurance provided by the VA or Rural Housing. Additionally, section 163(h)(3)(E)(iv)(II) disallows a deduction for amounts allocable to any period after December 31, 2010.
Section 419 of the 2006 Act also added section 6050H(h) to the Code, which generally provides that any person who, in the course of a trade or business, receives from an individual premiums for mortgage insurance aggregating $600 or more for any calendar year, shall make an information return in the form prescribed by the Secretary. As defined in section 6050H(h)(3)(B), the term mortgage insurance has the same meaning as qualified mortgage insurance in section 163(h)(4)(E). See also Tax Technical Corrections Act of 2007, Public Law 110172 (121 Stat. 2473) Sec. 11(b)(2).
On January 8, 2008, the IRS and the Treasury Department published
Notice 200815 (20084 IRB 4) (see Sec. 601.601(d)(2)(ii)(b)) to
provide guidance to individual taxpayers in determining the amount of
prepaid qualified mortgage insurance premiums that is treated as
qualified residence interest under section 163(h)(3)(E) that may be
deducted in 2007, and to reporting entities receiving premiums,
including prepaid premiums, for mortgage insurance in 2007. The notice
provides that an individual taxpayer may allocate the prepaid premium
ratably over the shorter of (1) the stated term of the mortgage, or (2)
84 months, beginning with the month in which the insurance was
obtained. The notice also provides that reporting entities that receive
mortgage insurance premiums of $600 or more in 2007 may report either
the portion of the amount received that is allocable to 2007, the
amount actually received, or the amount determined under an 84month
allocation method. The notice requested comments regarding the
appropriate allocation method and reporting requirements that should apply to future years.
Summary of Comments on Notice 200815 and Explanation of Provisions
In response to Notice 200815, the Treasury Department and the IRS received several comments concerning the appropriate allocation methodology for prepaid qualified mortgage insurance premiums that are treated as qualified residence interest under section 163(h)(3)(E). One commenter recommended adopting the rule from Notice 200815 permitting taxpayers to allocate a prepaid premium ratably over the shorter of (1) the stated term of the mortgage, or (2) 84 months. According to this commenter, an 84month allocation rule closely approximates the actual duration of the average mortgage insurance contract. Another commenter suggested adopting a threeyear allocation period to coincide with the Department of Housing and Urban Development's (HUD) policy of refunding prepaid premiums on FHA loans. Under this policy, HUD refunds prepaid FHA mortgage insurance premiums if the borrower refinances the mortgage through another FHA loan within the first three years of the original loan term.
After consideration of these comments, the Treasury Department and the IRS are adopting the rule from Notice 200815 concerning allocation of prepaid qualified mortgage insurance premiums based on the understanding that the average life of a mortgage insurance contract on home mortgages generally is seven years (84 months). Accordingly, the temporary regulations add a new provision to the regulations under section 163. Notwithstanding the general rules for the treatment of qualified residence interest (for example, the period over which certain points paid to refinance a mortgage are allocable), Sec. 1.16311T provides that an individual taxpayer may allocate prepaid qualified mortgage insurance premiums that are treated as qualified residence interest under section 163(h)(3)(E) over the shorter of (a) the stated term of the mortgage, or (b) a period of 84 months. Instructions for calculating the portion of prepaid qualified mortgage insurance premiums that are deductible in a particular taxable year are in Publication 936, ``Home Mortgage Interest Deduction.''
The Treasury Department and the IRS received several comments in response to Notice 200815 concerning the appropriate reporting requirement. Some commenters suggested that mortgage servicers be required to report all mortgage insurance premiums received during the taxable year, including prepayments. Others suggested allowing mortgage servicers to report either (1) the amount of mortgage insurance premiums received, or (2) the amount disbursed during the taxable year to the issuer of the mortgage insurance policy.
After consideration of these comments, the Treasury Department and the IRS are adopting a rule requiring mortgage servicers to report the amount of all mortgage insurance premiums, including prepaid mortgage insurance premiums, received in the calendar year. The temporary regulations accordingly add a new provision to the regulations under section 6050H. Section 1.6050H3T provides that a reporting entity that receives mortgage insurance premiums of $600 or more from an individual taxpayer during a calendar year shall make an information return setting forth the total amount received from that individual during the calendar year pursuant to the forms and instructions prescribed by the Secretary (currently reported in Box 4 of Form 1098 ``Mortgage Interest Statement'').
Several commenters suggested clarifying that there are separate $600 thresholds for reporting mortgage interest under section 6050H(a) and mortgage insurance premiums under section 6050H(h). Several commenters also requested inclusion of a separate standard for penalty relief for reporting mortgage insurance premiums in compliance with section 6050H(h). Such guidance is unnecessary, as sections 6050H(a) and 6050H(h) set forth separate $600 reporting thresholds for mortgage interest received and mortgage insurance premiums received, and the good faith standard for penalty relief in Sec. 301.67241(a)(2)(i) applies to the reporting of mortgage insurance premiums.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. For applicability of
[[Page 21258]]
the Regulatory Flexibility Act (5 U.S.C. chapter 5), please refer to
the Special Analyses section in the preamble to the crossreferenced
notice of proposed rulemaking published in the Proposed Rules section
in this issue of the Federal Register. Pursuant to section 7805(f) of
the Code, these regulations have been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on their impact on small business.
Drafting Information
The principal authors of these regulations are Angella Warren, Office of the Associate Chief Counsel (Income Tax and Accounting), and Stephen Coleman, Office of the Associate Chief Counsel (Procedure and Administration). However, other personnel from the IRS and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.16311T is added to read as follows:
Sec. 1.16311T Allocation of certain prepaid qualified mortgage insurance premiums (temporary).
(a) Allocation(1) In general. As provided in section
163(h)(3)(E), premiums paid or accrued for qualified mortgage insurance
during the taxable year in connection with acquisition indebtedness
with respect to a qualified residence (as defined in section
163(h)(4)(A)) of the taxpayer shall be treated as qualified residence
interest (as defined in section 163(h)(3)(A)). If an individual
taxpayer pays such a premium that is properly allocable to a mortgage
the payment of which extends to periods beyond the close of the taxable
year (prepaid premium), the taxpayer must allocate the premium to
determine the amount treated as qualified residence interest for each
taxable year. The premium must be allocated ratably over the shorter of
(i) The stated term of the mortgage; or
(ii) A period of 84 months, beginning with the month in which the insurance was obtained.
(2) Limitation. If a mortgage is satisfied before the end of its
stated term, no deduction as qualified residence interest shall be
allowed for any amount of the premium that is allocable to periods after the mortgage is satisfied.
(b) Scope. The allocation requirement in paragraph (a) of this
section applies only to mortgage insurance provided by the Federal
Housing Administration or private mortgage insurance (as defined by
section 2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as
in effect on December 20, 2006). It does not apply to mortgage
insurance provided by the Department of Veterans Affairs or the Rural
Housing Service. Paragraph (a) of this section applies whether the
qualified mortgage insurance premiums are paid in cash or are financed, without regard to source.
(c) Cross reference. For rules concerning the information reporting
of premiums, including prepaid premiums, for mortgage insurance, see Sec. 1.6050H3T.
(d) Effective/applicability date. This section applies to prepaid
qualified mortgage insurance premiums described in paragraph (a) of
this section paid or accrued on or after January 1, 2008, and on or
before December 31, 2010, for mortgage insurance provided by the
Federal Housing Administration or private mortgage insurers issued on or after January 1, 2007.
(e) Expiration date. The applicability of this section expires on May 7, 2012.
Par. 3. Section 1.6050H3T is added to read as follows:
Sec. 1.6050H3T Information reporting of mortgage insurance premiums (temporary).
(a) Information reporting requirements. Any person who, in the
course of a trade or business receives premiums, including prepaid
premiums, for mortgage insurance (as described in paragraph (b) of this
section) from any individual aggregating $600 or more for any calendar
year, shall make an information return setting forth the total amount
received from that individual during the calendar year pursuant to the forms and instructions prescribed by the Secretary.
(b) Scope. Paragraph (a) of this section applies to mortgage
insurance provided by the Federal Housing Administration, Department of
Veterans Affairs, or the Rural Housing Service (or their successor
organizations), or to private mortgage insurance (as defined by section
2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as in
effect on December 20, 2006). The rule stated in paragraph (a) of this
section applies to the receipt of all payments of mortgage insurance premiums, by cash or financing, without regard to source.
(c) Aggregation. Whether a person receives $600 or more of mortgage
insurance premiums is determined on a mortgagebymortgage basis. A
recipient need not aggregate mortgage insurance premiums received on
all of the mortgages of an individual to determine whether the $600
threshold is met. Therefore, a recipient need not report mortgage
insurance premiums of less than $600 received on a mortgage, even
though it receives a total of $600 or more of mortgage insurance
premiums on all of the mortgages for an individual for a calendar year.
(d) Cross reference. For rules concerning the allocation of certain
prepaid qualified mortgage insurance premiums, see Sec. 1.16311T of this chapter.
(e) Effective/applicability date. This section applies to mortgage insurance premiums received on or after January 1, 2008.
(f) Expiration date. The applicability of this section expires on May 4, 2012.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: April 23, 2009.
Bernard J. Knight, Jr,
Acting General Counsel of the Treasury.
[FR Doc. E910662 Filed 5609; 8:45 am]
BILLING CODE 483001P
FOR FURTHER INFORMATION CONTACT
Concerning Sec. 1.163-11T, Angela Warren, (202) 6224950; concerning Sec. 1.6050H3T, Stephen Coleman (202) 6224910 (not tollfree numbers).