IRS Extends/Revises Mortgage Deduction Safe Harbor for Assistance Payments To Financially Distressed Homeowners

The IRS has extended through 2015 its safe harbor for homeowners receiving federal or state assistance to compute their deduction for mortgage payments (Notice 2013-7, 2013-6 IRB 477). The IRS also extended the reporting relief provided to mortgage servicers and state and federal agencies.

In Notice 2011-14, 2011-11 IRB 544, the IRS addressed the income tax consequences and reporting obligations for payments made to or on behalf of financially distressed homeowners by state housing finance agencies, HUD’s Emergency Homeowners’ Loan Program, and state programs substantially similar to the EHLP. Payments are treated as payments to homeowners and are excluded from their income under the general welfare exclusion.

Under a safe harbor method for tax years 2010, 2011, and 2012, homeowners in any of the programs could deduct the sum of all payments the homeowner makes during the tax year on the home mortgage, but not in excess of the sum of the amount shown in Box 1 (mortgage interest received), Box 4 (mortgage insurance premiums but only for 2010 through 2011), and Box 5 (real property taxes) on Form 1098 for the year.

Notice 2011-14 provided reporting relief for 2011 and 2012. The IRS also will not assert penalties against a state HFA that fails to furnish Form 1098, as long as the HFA provides a statement to the homeowner and the IRS with the homeowner’s name and tax identification number and the amount of payments to a mortgage servicer. HUD must provide similar information for its payments.

Notice 2013-7 extends the safe harbor method and the reporting relief through 2015 (through 2013 for mortgage insurance premiums). Treasury continues to approve more state programs to which the relief applies. A current list of approved state programs is on Treasury’s website.