[Federal Register Volume 74, Number 87 (Thursday, May 7, 2009)]
[Rules and Regulations]
[Pages 21256-21258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-10662]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9449]
RIN 1545-BH84


Allocation and Reporting of Mortgage Insurance Premiums

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that explain how 
to allocate prepaid qualified mortgage insurance premiums to determine 
the amount of the prepaid premium that is treated as qualified 
residence interest each taxable year under section 163(h)(4)(F) of the 
Internal Revenue Code (Code). The temporary regulations also provide 
guidance to reporting entities receiving premiums, including prepaid 
premiums, for mortgage insurance. The temporary regulations reflect 
changes to the law made by the Tax Relief and Health Care Act of 2006 
and the Mortgage Forgiveness Debt Relief Act of 2007. The text of the 
temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on May 7, 2009.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.163-11T(d) and 1.6050H-3T(e).

FOR FURTHER INFORMATION CONTACT: Concerning Sec.  1.163-11T, Angela 
Warren, (202) 622-4950; concerning Sec.  1.6050H-3T, Stephen Coleman 
(202) 622-4910 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    Section 419 of the Tax Relief and Health Care Act of 2006, Public 
Law 109-432 (120 Stat. 2967) (2006 Act), added sections 163(h)(3)(E), 
(h)(4)(E), and (h)(4)(F) to the Code. Section 3 of the Mortgage 
Forgiveness Debt Relief Act of 2007, Public Law 110-142 (121 Stat. 
1803) (2007), amended section 163(h)(3)(E)(iv). In general, these new 
provisions treat certain qualified mortgage insurance premiums as 
qualified residence interest. This treatment applies only to certain 
qualified mortgage insurance premiums paid or accrued on or after 
January 1, 2007, and on or before December 31, 2010, on mortgage 
insurance contracts issued on or after January 1, 2007.
    Section 163(h)(3)(E)(i) provides that premiums paid or accrued for 
qualified mortgage insurance in connection with acquisition 
indebtedness for a qualified residence are treated as qualified 
residence interest for purposes of section 163. Section 163(h)(4)(E) 
defines qualified mortgage insurance as (i) mortgage insurance provided 
by the Veterans Administration (VA), the Federal Housing Administration 
(FHA), or the Rural Housing Administration (Rural Housing),\1\ and (ii) 
private mortgage insurance (as defined by section 2 of the Homeowners 
Protection Act of 1998 (12 U.S.C. 4901) as in effect on December 20, 
2006). The amount

[[Page 21257]]

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 
($500 in the case of a married individual filing a separate return) 
that the taxpayer's adjusted gross income exceeds $100,000 ($50,000 in 
the case of a married individual filing a separate return).
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    \1\ References in section 163(h)(4)(E)(i) to the Veterans 
Administration and Rural Housing Administration are interpreted to 
mean their respective successors, the Department of Veterans Affairs 
and Rural Housing Service.
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    Section 163(h)(4)(F) states that any amount paid by the taxpayer 
for qualified mortgage insurance that is properly allocable to any 
mortgage the payment of which extends to periods that are after the 
close of the taxable year in which the amount is paid shall be 
chargeable to capital account and shall be treated as paid in the 
periods to which the amount is allocated. No deduction shall be allowed 
for the unamortized balance of the account if the mortgage is satisfied 
before the end of its term. The allocation rules in section 
163(h)(4)(F) do not apply to amounts paid for qualified mortgage 
insurance provided by the VA or Rural Housing. Additionally, section 
163(h)(3)(E)(iv)(II) disallows a deduction for amounts allocable to any 
period after December 31, 2010.
    Section 419 of the 2006 Act also added section 6050H(h) to the 
Code, which generally provides that any person who, in the course of a 
trade or business, receives from an individual premiums for mortgage 
insurance aggregating $600 or more for any calendar year, shall make an 
information return in the form prescribed by the Secretary. As defined 
in section 6050H(h)(3)(B), the term mortgage insurance has the same 
meaning as qualified mortgage insurance in section 163(h)(4)(E). See 
also Tax Technical Corrections Act of 2007, Public Law 110-172 (121 
Stat. 2473) Sec.  11(b)(2).
    On January 8, 2008, the IRS and the Treasury Department published 
Notice 2008-15 (2008-4 IRB 4) (see Sec.  601.601(d)(2)(ii)(b)) to 
provide guidance to individual taxpayers in determining the amount of 
prepaid qualified mortgage insurance premiums that is treated as 
qualified residence interest under section 163(h)(3)(E) that may be 
deducted in 2007, and to reporting entities receiving premiums, 
including prepaid premiums, for mortgage insurance in 2007. The notice 
provides 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 notice also provides that reporting entities that receive 
mortgage insurance premiums of $600 or more in 2007 may report either 
the portion of the amount received that is allocable to 2007, the 
amount actually received, or the amount determined under an 84-month 
allocation method. The notice requested comments regarding the 
appropriate allocation method and reporting requirements that should 
apply to future years.

Summary of Comments on Notice 2008-15 and Explanation of Provisions

    In response to Notice 2008-15, the Treasury Department and the IRS 
received several comments concerning the appropriate allocation 
methodology for prepaid qualified mortgage insurance premiums that are 
treated as qualified residence interest under section 163(h)(3)(E). One 
commenter recommended adopting the rule from Notice 2008-15 permitting 
taxpayers to allocate a prepaid premium ratably over the shorter of (1) 
the stated term of the mortgage, or (2) 84 months. According to this 
commenter, an 84-month allocation rule closely approximates the actual 
duration of the average mortgage insurance contract. Another commenter 
suggested adopting a three-year allocation period to coincide with the 
Department of Housing and Urban Development's (HUD) policy of refunding 
prepaid premiums on FHA loans. Under this policy, HUD refunds prepaid 
FHA mortgage insurance premiums if the borrower refinances the mortgage 
through another FHA loan within the first three years of the original 
loan term.
    After consideration of these comments, the Treasury Department and 
the IRS are adopting the rule from Notice 2008-15 concerning allocation 
of prepaid qualified mortgage insurance premiums based on the 
understanding that the average life of a mortgage insurance contract on 
home mortgages generally is seven years (84 months). Accordingly, the 
temporary regulations add a new provision to the regulations under 
section 163. Notwithstanding the general rules for the treatment of 
qualified residence interest (for example, the period over which 
certain points paid to refinance a mortgage are allocable), Sec.  
1.163-11T provides that an individual taxpayer may allocate prepaid 
qualified mortgage insurance premiums that are treated as qualified 
residence interest under section 163(h)(3)(E) over the shorter of (a) 
the stated term of the mortgage, or (b) a period of 84 months. 
Instructions for calculating the portion of prepaid qualified mortgage 
insurance premiums that are deductible in a particular taxable year are 
in Publication 936, ``Home Mortgage Interest Deduction.''
    The Treasury Department and the IRS received several comments in 
response to Notice 2008-15 concerning the appropriate reporting 
requirement. Some commenters suggested that mortgage servicers be 
required to report all mortgage insurance premiums received during the 
taxable year, including prepayments. Others suggested allowing mortgage 
servicers to report either (1) the amount of mortgage insurance 
premiums received, or (2) the amount disbursed during the taxable year 
to the issuer of the mortgage insurance policy.
    After consideration of these comments, the Treasury Department and 
the IRS are adopting a rule requiring mortgage servicers to report the 
amount of all mortgage insurance premiums, including prepaid mortgage 
insurance premiums, received in the calendar year. The temporary 
regulations accordingly add a new provision to the regulations under 
section 6050H. Section 1.6050H-3T provides that a reporting entity that 
receives mortgage insurance premiums of $600 or more from an individual 
taxpayer during a calendar year shall make an information return 
setting forth the total amount received from that individual during the 
calendar year pursuant to the forms and instructions prescribed by the 
Secretary (currently reported in Box 4 of Form 1098 ``Mortgage Interest 
Statement'').
    Several commenters suggested clarifying that there are separate 
$600 thresholds for reporting mortgage interest under section 6050H(a) 
and mortgage insurance premiums under section 6050H(h). Several 
commenters also requested inclusion of a separate standard for penalty 
relief for reporting mortgage insurance premiums in compliance with 
section 6050H(h). Such guidance is unnecessary, as sections 6050H(a) 
and 6050H(h) set forth separate $600 reporting thresholds for mortgage 
interest received and mortgage insurance premiums received, and the 
good faith standard for penalty relief in Sec.  301.6724-1(a)(2)(i) 
applies to the reporting of mortgage insurance premiums.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For 
applicability of

[[Page 21258]]

the Regulatory Flexibility Act (5 U.S.C. chapter 5), please refer to 
the Special Analyses section in the preamble to the cross-referenced 
notice of proposed rulemaking published in the Proposed Rules section 
in this issue of the Federal Register. Pursuant to section 7805(f) of 
the Code, these regulations have been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on their 
impact on small business.

Drafting Information

    The principal authors of these regulations are Angella Warren, 
Office of the Associate Chief Counsel (Income Tax and Accounting), and 
Stephen Coleman, Office of the Associate Chief Counsel (Procedure and 
Administration). However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 1.163-11T is added to read as follows:


Sec.  1.163-11T  Allocation of certain prepaid qualified mortgage 
insurance premiums (temporary).

    (a) Allocation--(1) In general. As provided in section 
163(h)(3)(E), premiums paid or accrued for qualified mortgage insurance 
during the taxable year in connection with acquisition indebtedness 
with respect to a qualified residence (as defined in section 
163(h)(4)(A)) of the taxpayer shall be treated as qualified residence 
interest (as defined in section 163(h)(3)(A)). If an individual 
taxpayer pays such a premium that is properly allocable to a mortgage 
the payment of which extends to periods beyond the close of the taxable 
year (prepaid premium), the taxpayer must allocate the premium to 
determine the amount treated as qualified residence interest for each 
taxable year. The premium must be allocated ratably over the shorter 
of--
    (i) The stated term of the mortgage; or
    (ii) A period of 84 months, beginning with the month in which the 
insurance was obtained.
    (2) Limitation. If a mortgage is satisfied before the end of its 
stated term, no deduction as qualified residence interest shall be 
allowed for any amount of the premium that is allocable to periods 
after the mortgage is satisfied.
    (b) Scope. The allocation requirement in paragraph (a) of this 
section applies only to mortgage insurance provided by the Federal 
Housing Administration or private mortgage insurance (as defined by 
section 2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as 
in effect on December 20, 2006). It does not apply to mortgage 
insurance provided by the Department of Veterans Affairs or the Rural 
Housing Service. Paragraph (a) of this section applies whether the 
qualified mortgage insurance premiums are paid in cash or are financed, 
without regard to source.
    (c) Cross reference. For rules concerning the information reporting 
of premiums, including prepaid premiums, for mortgage insurance, see 
Sec.  1.6050H-3T.
    (d) Effective/applicability date. This section applies to prepaid 
qualified mortgage insurance premiums described in paragraph (a) of 
this section paid or accrued on or after January 1, 2008, and on or 
before December 31, 2010, for mortgage insurance provided by the 
Federal Housing Administration or private mortgage insurers issued on 
or after January 1, 2007.
    (e) Expiration date. The applicability of this section expires on 
May 7, 2012.


0
Par. 3. Section 1.6050H-3T is added to read as follows:


Sec.  1.6050H-3T  Information reporting of mortgage insurance premiums 
(temporary).

    (a) Information reporting requirements. Any person who, in the 
course of a trade or business receives premiums, including prepaid 
premiums, for mortgage insurance (as described in paragraph (b) of this 
section) from any individual aggregating $600 or more for any calendar 
year, shall make an information return setting forth the total amount 
received from that individual during the calendar year pursuant to the 
forms and instructions prescribed by the Secretary.
    (b) Scope. Paragraph (a) of this section applies to mortgage 
insurance provided by the Federal Housing Administration, Department of 
Veterans Affairs, or the Rural Housing Service (or their successor 
organizations), or to private mortgage insurance (as defined by section 
2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as in 
effect on December 20, 2006). The rule stated in paragraph (a) of this 
section applies to the receipt of all payments of mortgage insurance 
premiums, by cash or financing, without regard to source.
    (c) Aggregation. Whether a person receives $600 or more of mortgage 
insurance premiums is determined on a mortgage-by-mortgage basis. A 
recipient need not aggregate mortgage insurance premiums received on 
all of the mortgages of an individual to determine whether the $600 
threshold is met. Therefore, a recipient need not report mortgage 
insurance premiums of less than $600 received on a mortgage, even 
though it receives a total of $600 or more of mortgage insurance 
premiums on all of the mortgages for an individual for a calendar year.
    (d) Cross reference. For rules concerning the allocation of certain 
prepaid qualified mortgage insurance premiums, see Sec.  1.163-11T of 
this chapter.
    (e) Effective/applicability date. This section applies to mortgage 
insurance premiums received on or after January 1, 2008.
    (f) Expiration date. The applicability of this section expires on 
May 4, 2012.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: April 23, 2009.
Bernard J. Knight, Jr,
Acting General Counsel of the Treasury.
[FR Doc. E9-10662 Filed 5-6-09; 8:45 am]
BILLING CODE 4830-01-P