Wednesday, June 11, 2003

Tax cut bill: No relief for many who pay mortgage insurance

New Tax Bill: What's in it for Homeowners?

The massive new tax bill signed into law last week by President Bush promised to include major benefits for homeowners, some home sellers, and even prospective home buyers.

Unfortunately, one of the bill's most valuable provisions, the deductibility of private mortgage insurance (PMI) and government-backed mortgage insurance, got cut in the final version. It's a significant loss to the 10 million moderate income homeowners who must make the onerous monthly premium payments, which can add up to thousands of dollars a year.

Mortgage insurance is a requirement for homebuyers making a downpayment of less than 20 percent. It protects lenders against loss in the event a home buyer defaults on a home loan. For years tax experts have argued that since lenders are the only beneficiaries of mortgage insurance the premiums should be tax-deductible. The deduction would have saved homeowners a bundle.

"Not only is this a disappointment to existing homeowners. The ability to deduct the costs of mortgage insurance would have had tremendous secondary benefits to prospective home owners, as well" says Richard Roll, president of the American Homeowners Association (AHA). "This deduction would have allowed some 300,000 families, who now rent, to qualify for a mortgage."

Making mortgage insurance costs deductible had broad bi-partisan support in Congress. There is a strong probability the issue will be taken up again by lawmakers.

Another tax relief measure that affects homeowners, the capital gains rate reduction, did make it into the final version of the bill.

Home sellers are taxed on the profit they realize at the time they sell their home, except when they take advantage of their one-time exclusion. As the result of changes in the tax bill, now high-end capital gains taxes will drop to 15 percent from 20 percent. Tax rates at the lowest end will be reduced from 10 percent to 5 percent, enabling homeowners to keep more money in their wallets.

"In order for eligible home owners to take advantage of these capital gains tax breaks, they will need to sell before the end of 2008," Roll says, which is when the provision is set to expire.

The capital gains provision is set to expire in 2008, unless re-authorized by Congress.

[For more information on any aspect of buying and owning a home go to www.ahahome.com, the website of the American Homeowners Association (AHA).]