[Federal Register Volume 77, Number 88 (Monday, May 7, 2012)]
[Rules and Regulations]
[Pages 26698-26699]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10937]



[[Page 26698]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9588]
RIN 1545-BH84


Allocation of Mortgage Insurance Premiums

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final 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. The final regulations reflect changes to 
the law made by the Tax Relief and Health Care Act of 2006, the 
Mortgage Forgiveness Debt Relief Act of 2007, and the Tax Relief, 
Unemployment Insurance Reauthorization, and Job Creation Act of 2010. 
The regulations affect taxpayers who pay prepaid qualified mortgage 
insurance premiums.

DATES: Effective Date: These regulations are effective on May 4, 2012.
    Applicability Dates: For dates of applicability, see Sec.  1.163-
11(d).

FOR FURTHER INFORMATION CONTACT: Charles Kim, (202) 622-5020 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1. On May 7, 2009, 
the Treasury Department and IRS published temporary regulations (TD 
9449) under section 163 of the Internal Revenue Code (Code) in the 
Federal Register (74 FR 21256) 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. On the same day, the Treasury Department and IRS 
published a notice of proposed rulemaking (REG-107271-08) cross-
referencing the temporary regulations in the Federal Register (74 FR 
21295). No public hearing was requested or held. No comments responding 
to the notice of proposed rulemaking were received. The proposed 
regulations under section 163 are adopted as amended by this Treasury 
decision, and the corresponding temporary regulations under section 163 
are removed.
    TD 9449 also contained temporary regulations under section 6050H(h) 
that require persons who receive premiums, including prepaid premiums, 
for mortgage insurance to make a return setting forth the amount of 
premiums received. A notice of proposed rulemaking (REG-107271-08) 
cross-referencing the temporary regulations was published in the 
Federal Register on the same day (74 FR 21295). Because the deduction 
for mortgage insurance premiums currently does not apply to amounts 
paid or accrued after December 31, 2011, the Treasury Department and 
the IRS are not taking any action at this time with respect to the 
temporary regulations or the proposed regulations under section 
6050H(h). The temporary regulations will expire on May 4, 2012.
    Section 419 of the Tax Relief and Health Care Act of 2006, Public 
Law 109-432 (120 Stat. 2967) (2006), 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). Section 759(a) of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010, Public Law 111-312 (124 Stat. 3296) (2010), further 
amended section 163(h)(3)(E)(iv). In general, these new provisions 
treat certain qualified mortgage insurance premiums as qualified 
residence interest. This treatment only applies to certain qualified 
mortgage insurance premiums paid or accrued on or after January 1, 
2007, and on or before December 31, 2011, 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 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) (or fraction thereof) 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. Section 163(h)(4)(F) provides that the 
allocation rules under 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, 2011.

Explanation of Provisions

    These final regulations provide rules regarding the allocation of 
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).
    These final regulations apply to prepaid qualified mortgage 
insurance premiums paid or accrued on or after January 1, 2011. The 
treatment of mortgage insurance premiums as interest described in these 
final regulations is limited to prepaid qualified mortgage insurance 
premiums that are paid or accrued on or after January 1, 2011, and 
during periods to which section 163(h)(3)(E) is applicable. The 
temporary regulations are applicable to prepaid qualified mortgage 
insurance premiums paid or accrued on or after January 1, 2008, and on 
or before December 31, 2010.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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, and because the regulations do not 
impose a collection

[[Page 26699]]

of information on small entities, the Regulatory Flexibility Act (5 
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the 
Code, the notice of proposed rulemaking preceding these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business, and no 
comments were received.

Drafting Information

    The principal author of these regulations is Charles Kim, Office of 
the Associate Chief Counsel (Income Tax and Accounting). 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.

Adoption of Amendments to the Regulations

    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 1.163-11 is added to read as follows:


Sec.  1.163-11  Allocation of certain prepaid qualified mortgage 
insurance premiums.

    (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 in which the premium is paid, 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) Limitation on the treatment of mortgage insurance premiums as 
interest. This section applies to prepaid qualified mortgage insurance 
premiums described in paragraph (a) of this section that are paid or 
accrued on or after January 1, 2011, and during periods to which 
section 163(h)(3)(E) is applicable. This section does not apply to any 
amount of prepaid qualified mortgage insurance premiums that are 
allocable to any periods to which section 163(h)(3)(E) is not 
applicable.
    (d) Effective/applicability date. This section is applicable on and 
after January 1, 2011. For regulations applicable before January 1, 
2011, see Sec.  1.163-11T in effect prior to January 1, 2011 (Sec.  
1.163-11T as contained in 26 CFR part 1 edition revised as of April 1, 
2011).


Sec.  1.163-11T  [Removed]

0
Par. 3. Section 1.163-11T is removed.

 Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: April 24, 2012.
 Emily S. McMahon,
 Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-10937 Filed 5-4-12; 8:45 am]
BILLING CODE 4830-01-P