Private Mortgage Insurance (PMI) is a premium paid by home buyers to lenders when the value of the home loan they receive exceeds 80% of the appraised value of the property. PMI is charged by lenders to account for the additional risk they take on when funding loans secured by less than the traditional 20% minimum owner's equity.
Until recently, the cost of PMI was not a deductible expense for tax purposes. This despite the fact that PMI is essentially the same as interest paid on the loan it relates to. Mortgage interest is deductible for most homeowners. If interest is thought of as the payment to a lender to account for time value of money and the risk of default, then PMI does not seem much different. Why the tax code treated it differently was a source of confusion and anger for many owners caught in the PMI net. However, there is good news to report.
New tax legislation passed late in 2006 allows for the deduction of PMI premiums for property acquired during 2007. In order to receive the deduction, the premium must relate to the purchase, not refinance, of a principal residence. The premiums are deductible in the same manner as mortgage interest. The benefit phases out for single taxpayers who make over $50,000 and is completely phased out at $55,000. The deduction for married taxpayers filing jointly phases out at $100,000 with a complete phase out at $110,000. There is some confusion as to whether the deduction is discontinued at the end of 2007, but for now, qualifying taxpayers who purchase qualifying property in 2007 will be entitled to the additional deduction.
PMI is generally associated with purchases of principal residences, so it usually does not affect investors contemplating a 1031 Exchange. However, similar expenses relating to the acquisition of a loan should be paid for "out of pocket" rather than with the proceeds of a 1031 Exchange sale. Most other non-recurring closing costs can be paid for with exchange funds.
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