The IRS has finalized regulations (T.D. 9588) that explain how
to allocate prepaid qualified mortgage insurance (QMI) premiums to
determine the amount of the prepaid premium that is deductible each
Section 163(h) was amended in 2006 to allow certain QMI premiums
to qualify as residence interest for the purposes of claiming
qualified residence interest as an itemized deduction. Currently,
this applies only to certain QMI premiums paid or accrued after
Dec. 31, 2006, and before Jan. 1, 2012, on mortgage insurance
contracts issued after Dec. 31, 2006 However, this provision could
Section 163(h)(3)(E)(i) provides that premiums paid or accrued
for QMI in connection with acquisition indebtedness for a qualified
residence are treated as qualified residence interest for purposes
of Section 163 and, thus, are deductible. Section 163(h)(4)(E)
defines QMI as (1) mortgage insurance provided by the Veterans
Administration (VA), the Federal Housing Administration (FHA) or
the Rural Housing Administration (RHA); and (2) private mortgage
insurance. The amount 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 that the taxpayer's
adjusted gross income exceeds $100,000.
Section 163(h)(4)(F) states that any amount paid by the taxpayer
for QMI that can properly be allocated to any mortgage the payment
of which extends to periods after the close of the taxable year in
which the amount is paid shall be chargeable to a capital account
and shall be treated as paid in the periods to which the amount is
allocated. No deduction is allowed for the unamortized balance of
the account if the mortgage is satisfied before the end of its
term. Section 163(h)(4)(F) provides that the allocation rules under
this section do not apply to amounts paid for QMI provided by the
VA or the FHA.
The IRS first published temporary (T.D. 9449) and proposed (74
Fed. Reg. 21295) regulations on the issue in 2009. The regulations
explain how to allocate prepaid QMI premiums to determine the
amount of the prepaid premium that is treated as qualified
residence interest each taxable year. The regulations provide 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 final regulations adopt the temporary regulations and
apply to prepaid QMI premiums paid or accrued on or after Jan. 1,
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.