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Thursday, January 17, 2013
IRS extends safe harbor for governmental homeowner assistance payments
Notice 2013-13, 2013-6 IRB
In a Notice, IRS has extended through 2015 earlier guidance on the tax consequences of payments made to or on behalf of financially distressed homeowners, including the safe harbor method for computing a homeowner's deduction for payments made on a home mortgage. However, the safe harbor has been slightly modified to reflect the fact that the provision allowing taxpayers to treat mortgage insurance premiums as deductible qualified residence interest only applies through 2013. The Notice also extends penalty relief related to information reporting for mortgage services and state housing finance agencies.
Background. Payments made under legislatively provided social benefit programs for the promotion of general welfare are not includible in a recipient's gross income. (Rev Rul 74-205, 1974-1 CB 20, Rev Rul 98-19, 1998-1 CB 840) Two such programs include (1) programs designed by State Housing Finance Agencies (State HFAs) with funds allocated from the Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets (State Programs), and (2) HUD's Emergency Homeowners' Loan Program (EHLP) and any existing state program receiving funding from the EHLP (the substantially similar state programs, or SSSPs).
Under Code Sec. 6041, every person engaged in a trade or business (including state governments and their agencies) must: (1) file an information return for each calendar year in which the person makes in the course of its trade or business payments to another person of fixed and determinable income aggregating $600 or more; and (2) furnish a copy of the information return to that person. And under Code Sec. 6050H, every person engaged in a trade or business (including state governments and their agencies) must: (1) file an information return for each calendar year in which the person receives in the course of its trade or business payments from an individual of interest on a mortgage aggregating $600 or more; and (2) furnish a copy of the information return to that individual.
Previous guidance.Notice 2011-14 provided guidance on the federal tax consequences of, and information reporting obligations associated with, payments made to or on behalf of financially distressed homeowners under the above-described State Programs and HUD's EHLP (and SSSPs receiving funding from it). In general, such payments aren't included in the recipient's gross income under the above “general welfare exclusion” rules.
...Safe harbor. This safe harbor rule, in effect for tax years 2010 through 2012, allowed an eligible homeowner to deduct on his federal income tax return an amount equal to the sum of all payments he actually made during that year to the mortgage servicer, HUD, or the State HFA on the home mortgage, but not in excess of the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums, for years 2010 and 2011 only), and box 5 (real property taxes).
...Information reporting relief. IRS provided that payments to or on behalf of a homeowner made under State Programs, the EHLP, and the SSSP are not subject toCode Sec. 6041. Also, interest received from a governmental unit (or agency or instrumentality) is not reportable under Code Sec. 6050H as interest received on a mortgage.
(i) a mortgage servicer that reports on Forms 1098 (Mortgage Interest Statement) payments received under a State Program, the EHLP, or an SSSP during calendar years 2011 or 2012 if the servicer notifies homeowners that the amounts reported on the Forms 1098 are overstated because they include government subsidy payments; or
(ii) any State HFA for failing to file and furnish correct Forms 1098, in either 2011 or 2012, if the State HFA provides each homeowner and IRS with a statement setting forth (a) the homeowner's name and taxpayer identification number (TIN), and (b) the amount of payments that the State HFA made to a mortgage servicer under the State Program or the SSSP during that year.
In Rev Proc 2011-55, 2011-47 IRB 793, IRS supplemented Notice 2011-14 and specified where the State HFAs and HUD should send these statements, applicable filing deadlines, and also advised them of Form 1098-MA (Mortgage Assistance Payments), which they could opt to use as a statement that satisfied the above requirements. (See Weekly Alert ¶ 24 11/03/2011 for more details.)
New guidance.Notice 2013-7 extends the above relief through 2015. It amplifies Notice 2011-14 by: extending the safe harbor method for computing a homeowner's deduction for payments made on a home mortgage (see below); extending the relief from mortgage servicers and State HFAs from penalties relating to information reporting; and advising HUD that it may rely on Notice 2011-14 to report payments made to mortgage servicers to homeowners and IRS.
In addition, Notice 2013-7 amplifies Notice 2011-14 by revising the safe harbor method for computing a homeowner's deduction in light of the fact that Code Sec. 163(h)(3)(E), which allows taxpayers to deduct mortgage insurance premiums as qualified residence interest, was recently reinstated and extended by the 2012 Taxpayer Relief Act to apply to premiums paid or accrued before 2014.
Accordingly, for tax years 2010 through 2015, an eligible homeowner (i.e., one who meets the requirements of Code Sec. 163 and Code Sec. 164, and participates in one of the programs described above) may apply Notice 2011-14's safe harbor to deduct the lesser of: (i) the sum of all payments on the home mortgage that the homeowner actually makes during a tax year to the mortgage servicer, HUD, or the State HFA; or (ii) the sum of amounts shown on Form 1098 for mortgage interest received, real property taxes, and (for years 2010 through 2013 only) mortgage insurance premiums.