upfront MIP

that would seem logical, feema. for 100% clarification, you can check with the irs on their site (irs.gov). but payment in full would certainly prevent your needing to schedule your deduction over the term of the loan (or portion thereof).

On my Hud-1 settlement statement the MIP was paid from my settlement charges...my closing costs. This was not rolled into the loan. However, apart from that payment, my monthly mortgage payment includes escrow. In the escrow breakdown, it shows MIP monthly payments. So is it possible that the UFMIP I paid is just a portion? And if so, do I still multiply it by 84 months?

Hi Margo,

The mortgage insurance premiums have to be allocated over the shorter of the mortgage term or 84 months. If the upfront premium you paid is allocated over a period of 84 months, you can deduct a certain amount of money for mortgage insurance for a particular year. To do the calculations, you need to divide the mortgage insurance by 84 and then multiply the result by the number of months in a year the property was insured by the mortgage insurance.

This is a tricky one. The IRS is not very descriptive regarding FHA upfront MIP unlike VA and RH. VA is considered a funding fee and the RH is considered a guaranty fee which are both fully deductible in the year it is paid.

Here's the important thing. They are called fees. So based on the that it makes sense that one should be able to take the full deduction. So now the question is, is FHA upfront a prepayment or a fee?

If it is a prepayment it would make sense that it needs to be allocated, however if it is consider a fee, one should be able to take the full deduction in the year paid.

As for the allocation, though the IRS states 84 months or the life of the loan which ever is shorter. I believe you should technically be able to allocated based on what the prepayment is covering. So it gets more involved to get a TRUE allocation. With that said, one should really understand what period is the upfront mip is covering. If everything is made simple and this upfront mip is considered a fee and not a prepayment our lives would be that much easier.

After further researching upfront mip. I discovered that there is a pro rata share refundable if you go from a fha to a conventional loan. So based on that it sure sounds like a prepayment. Again with the refund, it is based on what the period the upfront is covering.

I am an accountant, but taxation is not what i specialize in. Always best to consult with a CPA that specializes in taxation. However, unfortunatly not all CPA will give you the same or correct answer as it is there interpertation of IRS code. Remember IRS codes are open to challenge.

I think the best bet here would be for everyone to fully understand how there upfront mip is structured.

Hope this helps, but its still not the final answer. As mentioned, this is a tricky one.

thanks for the additional expertise and advice, jvc.

I'm looking at a Settlement document and the MIP is listed under 'ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE' and in this case the seller paid the MIP for an unspecified time. It is included in the settlement charges to the borrower, which appear to part of the financed mortgage loan.

I tend to agree with Howard in his interpretation of the IRS article, since Publication 936 'Home Mortgage Interest Deduction' implies the same thing.

I have also been looking for an answer to this. My 1098 box 4 has a value and I have been told that the IRS gets the same form and will see that same value and will not look into the matter if they match. This makes me think that it is all deductable. However, the person who told me is a professional tax preparer, but not a CPA.

I will be calling the IRS for an answer. If someone else receives an a direct answer from the IRS before me, please post it. Thanks.

a "professional tax preparer" ought to be sufficiently knowledgeable about tax law to be relied upon. you don't need a cpa to review tax laws - if you have one, that's fine, but a "tax advisor" is sufficient. check out irs guidelines on who you should be talking to.

I have recently finished a phone conversation with the IRS. I called 1-800-829-1040 and asked my specific question regarding upfront PMI. After she asked me several questions about my return she put me on hold for a few min.

The Answer: According to my 2009 HUD-1 statement it says on line 807:

FHA Upfront MIP - Payable in Connection with Loan to US DEPT of HUD = $*,***.00

This is according to the IRS a payment for PMI to the HUD. It does not matter if it was financed. The only stipulation is you have to check with your mortgage lender if it was considered pre-paid (it is most likely not pre-paid).

She told me what it says on Box 4 of my 1098 is what I need to report. And she understood the confusion of Pub. 936 on the www.irs.gov website where it says to divide by 84 months. Box 4 would either have been left blank or would have been corrected for pre-paid PMI.

FYI, I am not a professional tax preparer or a CPA. Please call the IRS and your lender to verify the information which I have found.

i thing the real issue here is whether the up-front premium is a prepayment of the mortgage insurance or a cost of obtaining the insurance - and thus qualifying for the loan. the fha up-front premiums are no longer refundable unles you refinance with fha. that's reason to believe that they are not pre-payments. if you look at irs publication 936, the example given is one in which the lender prepaid the entire cost of the mortgage insurance up front, rather than paying monthly amounts. if you visit the hud webside, you will see that the up-front premium is a cost, in addition to the monthly amounts. wouldn't that make it fully tax deductible in the year of payment?

I would have to agree with you. In the example it says Ryan pre-paid ALL of the PMI. You must pay PMI until you reach 78% equity (as stated for me with my lender).

And real example of this would be:

I owe ~$100/month for my PMI. I have a 30 yr mortgage. I would be at 82% equity after 129 monthly payments. If I were to have pre-paid my PMI last year I would have paid an additional 129 x $100 = $12,900. Now I would not owe PMI for my loan. I would not have been able to deduct all of this because it is amortized. So my additional deduction would be (if I bought the house in Jan 2009) = $12,900 /84 * 12 = $1843. And in 2010 another $1843 but not in 2011 unless the law changes.

I see this as not a common example for people with FHA mortgages since we are mainly young 1st time home buyers only needing to put down 3.5%. Yes I would have had a bigger deduction if I prepaid my PMI but I did not have an additional $12,900 to bring at closing.

The definition for Box 4 should be changed to read: Upfront PMI paid + Monthly PMI paid + the corrected amortized portion of the pre-paid PMI.

I think it is clear now, but would someone verify this explanation with either the IRS or a CPA?

At the advice of the IRS agent as relayed to squalla04, I called my mortgage lender - Chase. My settlement statement also indicates FHA MIP to HUD $---. Chase informed me that they received no part of that payment, that my monthly MIPs will continue until the loan to value ratio is below 78%, and the up-front payment had no effect on the monthly MIP. These are set by HUD. Thus, at least in my case, I think that's reason to take a full deduction for 2009.

It won't let me edit it right now so I just wanted to fix where I said 78% and 82%. I meant 22% equity, therefore 78% remaining.

Upfront: You may pay a portion of the total MIP (say half) at closing and bake the remaining half into the load. The upfront portion is tax deductible in the year in which it was incurred.

Lump sum: It is clear that the borrower just made a lump sum payment that covers future payment (note that this is different from "upfront"). This is just like paying my homeowners' association dues in a lump sum for the next 3 years. Because this was a lump sum amount that covers insurance for future months, you deduct only what is applicable for that year.

Even if it is not to cover future payments it is tax deductable. The FHA incurrs a 1.75% fee that can be financed into the mortgage. This 1.75% is upfront private mortgage insurance and it is fully tax deductable (if you are below $100k AGI). I basically had an extra $3800 deduction the year I bought my house because of the 1.75% fee inposed by the FHA plus the $107 per month I had to pay for MIP. Also this is only through 2010 unless they change the tax law.