IRS updates guidance on taxability of payments to homeowners from state and local COVID funds

Accounting

The Internal Revenue Service added new information to its frequently-asked-questions page on coronavirus State and Local Fiscal Recovery Funds and the tax rules surrounding the use of such funds for helping homeowners with mortgage insurance and home purchases, as well as government reporting obligations. 

The SLFR funds, which were included as part of the American Rescue Plan Act last year, provided eligible state and local governments with $350 billion in extra resources to meet their pandemic response needs. The IRS added new information on three topics Wednesday to the FAQ page.

For individuals whose state or local government is using SLFR funds to pay some or all of the down payment and closing costs associated with their purchase of a home under a program to support those negatively impacted by the COVID-19 pandemic, the IRS answered the question of whether assistance received under this program should be included in gross income.

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Andrew Harrer/Bloomberg

The IRS responded no, the amount of this assistance would not be included in gross income. “Payments using SLFR funds are made by a state or local government to individuals to promote the general welfare of qualifying individuals who are negatively impacted by the COVID-19 pandemic, a qualified disaster,” said the IRS. “As such, they are considered qualified disaster relief payments under section 139 of the Code and are excluded from gross income. However, payments made to or for the benefit of an individual are not treated as qualified disaster relief payments to the extent the expense of the individual compensated by such payment is otherwise compensated for by insurance or otherwise.”

Related to that question, if an individual taxpayer is receiving assistance from the SLFR funds to pay some or all of the premium mortgage insurance on their purchase of a home, the IRS answered the question of whether they can deduct the PMI costs paid through the program. In this case, the premium mortgage insurance costs are not deductible for individuals. They can’t claim a tax deduction or credit for expenses that are excluded under section 139 of the Tax Code. 

Finally, the IRS answered a question for state and local governments that are using the SLFR funds to pay some or all of the down payment and closing costs associated with individuals’ purchases of homes. The question is whether the state or local government has an obligation to file a Form 1099 or other information return with respect to those payments? The answer again is no. 

“A Form 1099-MISC reporting the payment would be required if the payment constituted income to the recipient,” said the IRS. “In this case, because the payment is not income, no Form 1099-MISC or other information return is required to be filed with the IRS or furnished to the recipient.”

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