Tax treatment of COVID-19 homeowner relief payments clarified

Homeowners who receive or benefit from payments from a federal homeowner assistance fund were given an optional IRS safe harbor for computing their itemized deductions for mortgage interest and real property taxes.

The guidance, in Rev. Proc. 2021-47, is intended to allow taxpayers to compute their itemized deductions for mortgage interest and real 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 Homeowner Assistance Fund (HAF). It also clarifies that HAF payments are excluded from homeowners’ gross income and addresses information reporting issues for payers and lenders.

Money from the HAF, established as a COVID-19 pandemic relief measure by the American Rescue Plan Act (ARPA), P.L. 117-2, is distributed to states, territories, tribes, and the District of Columbia (“eligible entities”) to assist homeowners in preventing mortgage delinquencies, defaults, or foreclosures and loss of utility and home energy services. It can help defray mortgage payments; utility and internet service payments; premiums for homeowner’s, flood, and mortgage insurance; and charges for homeowner’s and similar associations, among other expenses. The money may be paid directly to homeowners or to lenders or other qualified third parties on homeowners’ behalf. ARPA made nearly $10 billion in HAF money available for federal fiscal years 2021 through 2025. For more information about the program, see Treasury’s HAF webpage.

Some of these qualified expenses are also generally claimable by homeowner-taxpayers as itemized deductions on their returns (“qualified housing payment expenses”). However, under Sec. 139(h), no deduction or credit is allowed for, or by reason of, any qualified disaster relief payment or qualified disaster mitigation payment, which includes HAF payments, to the extent that the payment is excluded from gross income under Sec. 139(a).

Safe harbor

The revenue procedure prescribes two safe-harbor methods, the allocation method and the deduction method, for homeowners to compute their itemized deductions for mortgage interest and real property taxes if, in the same tax year, they:

• Received a HAF payment (or had a HAF payment made on their behalf);
• Used the payment to pay qualified expenses, at least one of which is a qualified housing payment expense;
• Paid a portion of a qualified housing payment expense from their own sources;
• Claim itemized deductions on their federal income tax returns; and
• Meet the statutory requirements to deduct the qualified mortgage interest expenses or qualified real property tax expenses if paid from their own sources.

Under the allocation method, a homeowner may first allocate HAF payments to qualified expenses that are not qualified housing payment expenses before allocating the remaining portion of HAF payments to qualified housing payment expenses.

Under the deduction method, a homeowner may deduct as qualified mortgage interest expenses or qualified real property tax expenses the lesser of (1) the sum of payments the homeowner actually makes to the homeowner’s mortgage servicer during a tax year between 2021 through 2025 for qualified housing payment expenses from the homeowner’s own sources, or (2) the sum of those qualified expenses shown on a Form 1098, Mortgage Interest Statement, issued to the homeowner.

Information reporting

Under the revenue procedure, eligible entities making HAF payments of $600 or more during a tax year to, or on behalf of, a homeowner do not have to report them to the homeowner (and the IRS) on Form 1099-MISC, Miscellaneous Information. However, HAF payments they make directly to third parties on behalf of taxpayers, such as to insurance companies and homeowners’ associations, do generally have to be reported to those third parties, with certain exceptions.

Lenders or mortgage servicers that receive a homeowner’s mortgage payments directly from an eligible entity should not report the interest so received on Form 1098. However, mortgage insurance premiums treated as interest aggregating $600 or more during a tax year received by lenders or mortgage servicers must be reported without regard to their source on Form 1098.

The revenue procedure also provides relief from penalty for lenders that file and furnish a Form 1098 that erroneously includes mortgage interest received directly from a state, so long as they notify the homeowner of the error and overstated amount within 30 days.

The revenue procedure was effective as of Nov. 8, 2021, and applies to qualified expenses paid after Jan. 21, 2020.

• Rev. Proc. 2021-47