Don’t count on private mortgage insurance deduction in 2014

Real Estate Tax Talk

If you buy a home with less than 20 percent down and have to pay private mortgage insurance, are the PMI premiums deductible?

In 2013, maybe. In 2014 and later, who knows.

Tax time image via Shutterstock.
Tax time image via Shutterstock.

Homebuyers who purchase homes with less than 20 percent down are typically required by their lenders to obtain private mortgage insurance. The insurer pays the monthly payments to the lender in the event the buyer defaults.

PMI premiums run about $50 per month for every $100,000 of financing. Thus, for example, if you have a $500,000 loan, you’ll pay about $250 per month for PMI. These payments are made along with your loan payments.

Starting in 2007, PMI premiums have been deductible as a personal itemized deduction — the same as interest on a home loan. Thus, you must itemize your deductions to take the PMI deduction. If, for example, you pay $250 per month for PMI, you’ll have an additional $3,000 in personal itemized deductions. If you’re in the 25 percent tax bracket, this will save you $750 in federal income tax.

However, unlike the case with home mortgage interest, there is an annual income ceiling on the PMI deduction. You’ll qualify for the full deduction if your adjusted gross income is no more than $100,000. However, the deduction is phased out by 10 percent for each $1,000 by which your AGI exceeds $100,000. You get no deduction at all if your AGI exceeds $110,000.

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The PMI deduction is available only for home loans entered into during 2007 through 2013. Moreover, the deduction is scheduled to terminate on Jan. 1, 2014. It could be extended beyond 2013, but whether Congress will actually do this is anyone’s guess. So don’t count on being able to deduct your PMI premiums during 2014 or later.

By the way, you don’t have to pay PMI premiums forever. Once you build up a specified amount of equity in your home, the need for PMI ends. The Homeowners Protection Act of 1998 requires your lender to automatically cancel your PMI once your equity equals 22 percent of your home’s original appraised value.

However, you don’t necessarily have to wait this long. You can request that your lender voluntarily cancel your PMI once your equity reaches 20 percent of your home’s current market value. For example, if you own a home with a fair market value of $500,000, you can request that the lender cancel your PMI once you’ve paid down $100,000 of your loan principal. Your lender isn’t required to grant your request, but you’ll bolster your case if you have a good payment history.

The Mortgage Insurance Companies of America estimates that 90 percent of homeowners stop paying PMI premiums within five years.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor” and “Working with Independent Contractors.