Homeowners must include ARM interest refunds as income.

• Author: Belotsky, Vincent P., Jr.
• Position: Adjustable rate mortgage - Brief Article

Homeowners who claim an itemized deduction for interest paid on an adjustable rate mortgage (ARM) and who receive a refund from their mortgage companies in a following year for an earlier interest overcharge must include the refund in income for the year of the refund.

Recently issued Rev. Rul. 92-91 held: 1. Interest deduction: If a homeowner paid an interest overcharge as the result of a financial institution's miscalculation of interest on an ARM, the homeowner may deduct the overcharge in the year of payment as qualified residence interest under Sec. 163(h)(3). 2. Income inclusion: If the homeowner recovers the interest overcharge in a subsequent year, the amount recovered is includible in the homeowner's gross income in the year of recovery, to the extent the deduction of the interest overcharge reduced the homeowner's Federal income tax in a prior tax year. This result is the same whether the financial institution refunds the interest overcharge or reduces the outstanding principal on the homeowner's mortgage.

Rev. Rul. 92-91 applies to taxpayers who have paid ARM interest at a rate subsequently determined by the lender to be too high, and have claimed the amount as an itemized deduction. The ruling does not affect taxpayers who claimed the standard deduction on their tax return and then received an ARM interest refund; those taxpayers will not need to report the...