Mortgage Assistance Payments
Payments received under the following programs are in the nature of general welfare (under the “general welfare exclusion”) and aren't included in the recipient's gross income:
-
(1) Mortgage assistance payments made by the Department of Housing and Urban Development (HUD) under Sec. 235 of the National Housing Act. The taxpayer-mortgagor doesn't get an interest deduction., IRS regs bar any interest deduction with respect to a taxpayer's indebtedness to the extent of assistance payments made by HUD under Sec. 235 of the National Housing Act (Reg § 1.163-1(d)).
-
(2) Payments made on behalf of homeowners under Department of Treasury's and Department of Housing and Urban Development's (HUD) Home Affordable Modification Program (HAMP) to the mortgage holder, where the borrower is eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to HAMP's Principal Reduction Alternative (PRA). For information on debt relief under HAMP, see Chapter 2.9.
-
(3) Payments made to or on behalf of homeowners under state housing finance agency programs listed in Notice 2011-14, Appendix, and updated at www.treasury.gov/HHF, with funds allocated from the Housing Finance Agency's (HFA's) Hardest Hit Fund. For tax years 2010 through 2021 the safe harbor deduction for taxpayers who receive these payments is the lesser of:
-
The amounts actually paid during the year to the mortgage servicer, HUD, or the State HFA on the home mortgage, or
-
The sum of the amounts shown on Form 1098 as interest, real property tax, and, if deductible under Sec. 163(h)(3)(E), deductible mortgage insurance premiums. (Notice 2015-77, as amplified by Notice 2017-40)
-
This safe harbor rule applies for a tax year if the homeowner: (a) meets the requirements of Code Sec. 163 and Code Sec. 164 to deduct all of the mortgage interest on the loan and all of the real property taxes on the principal residence; and (b) participates in the EHLP, an SSSP, or a State Program described in the Appendix to Notice 2011-14, in which the program payments could be used to pay interest on the home mortgage.
-
Modified Safe Harbor - Notice 2018-63 addresses homeowners who may be affected by the TCJA’s $10,000 limitation on deductible property taxes as it relates to the Hardest Hit Fund safe harbor. Under the modified safe harbor, participating homeowners may allocate mortgage payments actually made first to deductible mortgage interest, and thereafter use any reasonable method to allocate the remaining balance of payments made to real property taxes, mortgage insurance premiums, home insurance premiums and principal.
-
(4) Payments made on behalf of homeowners under the Department of Housing and Urban Development's (HUD's) Emergency Homeowners' Loan Program (EHLP) or from substantially similar state programs (SSSPs) receiving funding from EHLP. The safe harbor mortgage interest deduction for tax years 2010 through 2021 is the same as for #3 above.
-
(5) Payments made to or on behalf of financially distressed individual homeowners by certain entities (e.g., U.S. states, District of Columbia, Puerto Rico) with funds allocated from the Homeowner Assistance Fund (HAF), which was established by the American Rescue Plan Act in response to the COVID-19 pandemic. A homeowner receiving a HAF payment, or on whose behalf a HAF payment is made, for qualified expenses cannot take a deduction or credit with respect to those expenses (but see “safe harbor” below). Qualified expenses include:
-
Mortgage payment assistance,
-
Utilities and internet service,
-
Homeowner’s insurance, flood insurance and mortgage insurance,
-
Homeowner’s and condominium association fees, or common charges.
-
HAF Safe Harbor
For taxable years beginning on or after January 1, 2021, and before January 1, 2026, a homeowner may use this safe harbor to calculate the homeowner’s itemized deduction for qualified mortgage interest expenses and/or qualified real property tax expenses, as applicable. The deduction allowed is the lesser of:
-
The sum of all payments the homeowner actually makes from the homeowner’s own sources during the taxable year to the mortgage servicer; or
-
The sum of amounts shown on Form 1098, Mortgage Interest Statement, for qualified housing payment expenses.
A homeowner may first allocate the HAF payments to qualified expenses that are not qualified housing payment expenses before allocating the remaining portion of the HAF payments to qualified housing payment expenses. A qualified housing payment is a payment for a mortgage or taxes that would be eligible to be deducted on the taxpayer’s return. (Rev Proc 2021-47)
Information Reporting
IRS Form 1098-MA is used by the various governmental agencies to report Payments by State Housing Finance Agencies (HFAs) or the Department of Housing and Urban Development (HUD). The following are the box descriptions for that form:
-
Box 1 - Shows the total amount of State HFA/HUD mortgage assistance payments and homeowner mortgage payments.
-
Box 2 - Shows the amount of State HFA/HUD mortgage assistance payments.
-
Box 3 - Shows the amount of homeowner mortgage payments.
HAF Assistance Reporting - Lenders who receive a homeowner’s mortgage payments directly from a state should not report the interest received from the state on Form 1098 as interest received on the homeowner’s mortgage.