Tax treatment of COVID-19 relief payments for homeowners clarified
Homeowners who receive or benefit from payments from a federal homeowner assistance fund were given an optional IRS safe haven on Monday to calculate their itemized deductions for mortgage interest and property taxes.
Orientation, in Rev. Proc. 2021-47, is intended to allow taxpayers to calculate their itemized deductions for mortgage interest and property taxes when they have received a payment in the same tax year (or a payment has been made on their behalf) from the program , the Landlord Assistance Fund (HAF). It also clarifies that HAF payments are excluded from gross homeowners income and addresses information reporting issues for payers and lenders.
HAF money, established as a COVID-19 pandemic relief measure by the American Rescue Plan Act (ARPA), PL 117-2, is distributed to states, territories, tribes and the District of Columbia (” qualifying entities ”) to help homeowners prevent defaults, defaults or mortgage foreclosures and loss of utilities and home energy. This can help pay off mortgage payments; utility and Internet payments; home, flood and mortgage insurance premiums; and fees for homeowners associations and the like, among other expenses. Money can be paid directly to homeowners or lenders or other qualified third parties on their behalf. ARPA has made nearly $ 10 billion in HAF funds available for federal fiscal years 2021 to 2025. For more information on the program, see The Treasury website.
Some of these qualifying expenses are also generally claimable by homeowners / taxpayers as itemized deductions on their returns (“qualifying housing payment expenses”). However, under Sec. 139 (h), no deductions or credits are allowed for, or by reason of a payment qualified as Disaster Relief or a payment qualified as Disaster Mitigation, including by the HAF, to the extent where payment is excluded from gross income under Sec. 139 (a).
The tax procedure prescribes two safe-haven methods for homeowners to calculate their itemized deductions for mortgage interest and property taxes when, in the same tax year, the homeowner received or benefited from an HAF payment that can be used. to pay a portion of a homeowner’s mortgage interest and / or property taxes and the owner also paid a portion of mortgage interest and property taxes with funds from their own sources:
- As part of the safe harbor of allocation, a landlord can first allocate HAF payments to qualifying expenses that are not qualifying housing payment expenses before directing the remaining portion of the HAF payments to housing expenses. eligible housing payment; Where
- Under the safe haven deduction, a landlord may deduct as qualifying mortgage interest expense or qualifying property tax expense the lesser of (1) the sum of any payments the landlord actually makes to the landlord’s mortgage agent. in a tax year between 2021 and 2025 for housing payment expenses from the owner’s own sources, or (2) the sum of such eligible expenses shown on a Form 1098, Mortgage interest statement, issued to the owner.
Safe Harbor assignment is available to owners who:
- Received an HAF payment (or caused an HAF payment to be made on their behalf);
- used the payment to pay for qualifying expenses, at least one of which is a qualifying housing payment expense;
- paid part of an eligible housing payment expense from their own sources;
- Claim itemized deductions on their federal income tax returns; and
- Meet the legal requirements to deduct eligible mortgage interest expenses if paid from their own sources or to deduct eligible property tax expenses if paid from their own sources.
As part of the tax process, qualifying entities making HAF payments of $ 600 or more in a tax year to an owner or on behalf of an owner do not have to report them to the owner ( and IRS) on Form 1099-MISC, Various information. However, HAF payments they make directly to third parties on behalf of taxpayers, such as insurance companies and homeowners associations, generally have to be reported to these third parties, with a few exceptions.
Lenders or mortgage agents who receive mortgage payments from an owner directly from a qualifying entity should not report any interest so received on Form 1098. Reported regardless of its source on Form 1098.
The tax process also provides, under prescribed conditions, including notice to the owner, penalty relief for lenders who file and provide a Form 1098 that incorrectly includes mortgage interest received directly from a state.
The revenue procedure is effective from November 8, 2021 and applies to eligible expenses paid after January 21, 2020.
– Paul Bonner ([email protected]) is a JofA editor-in-chief