Tax Treatment of Mortgage Assistance Payments

Posted by Lee Reams Sr. on

We have received numerous questions related to the tax treatment of the mortgage assistance payments reported on Form 1098-MA, specifically about the taxability of these payments and the amount that is deductible as home mortgage interest.

Taxability: Under the so-called general welfare exclusion, the IRS has held that payments by governmental units under legislatively provided social benefit programs cannot be included in the recipient’s gross income.

To qualify under this administrative general welfare exclusion, the payments must:

(1) be made to individuals;

(2) come from a governmental fund;

(3) promote the general welfare based on individual or family need; and

(4) not represent compensation for services.

Deductibility - If the mortgage assistance payments are made by the Department of Housing and Urban Development (HUD) under Sec. 235 of the National Housing Act, the taxpayer-mortgagor cannot take an interest deduction. IRS regulations bar any interest deduction with respect to a taxpayer’s indebtedness due to HUD assistance payments under Sec. 235 of the National Housing Act (Reg § 1.163-1(d)).

However, if the taxpayer-mortgagor actually paid a portion of the mortgage payment, participated in an HFA Hardest Hit Fund program in which program payments could be used to pay mortgage interest, and meets the rules to deduct all of the mortgage interest on the loan, all of the mortgage insurance premiums, and all of the real property taxes on his or her main home, he or she would be entitled to a safe harbor deduction of the lesser of: 

a. The amounts actually paid during the year to the mortgage servicer, HUD, or the State HFA on the home mortgage, or

b. The sum of the amounts shown on Form 1098 as interest, real property tax, and deductible mortgage insurance premiums.