n-18-63.pdf

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Amplification and Modification of Safe Harbor Method for Participants in the HFA
Hardest Hit Fund

Notice 2018-63
PURPOSE
This notice amplifies and modifies Notice 2017-40, 2017-32 I.R.B. 190, which
applies to homeowners participating in the Treasury Department’s Housing Finance
Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund).
Notice 2017-40 provides that a participating homeowner may use a safe harbor method
for computing the amount of mortgage interest deductible under § 163 of the Internal
Revenue Code (Code) and real property taxes deductible under § 164(a)(1) relating to
the homeowner’s principal residence. This notice extends application of a modified
version of that safe harbor method to homeowners who may be affected by the new
limitation in § 164(b)(6)(B) on the amount of deductible real property taxes. The
modified safe harbor permits a participating homeowner to allocate mortgage payments
actually made during a taxable year first to deductible mortgage interest.
BACKGROUND
Notice 2017-40 provides a safe harbor method for computing the deductions
under §§ 163 and 164 on a principal residence for homeowners participating in a
program designated by state housing finance agency (State HFA) using funds allocated
from the HFA Hardest Hit Fund (State Program). Under Notice 2017-40, the safe

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harbor is available for the taxable year if the homeowner (1) meets the requirements to
deduct all of the mortgage interest and real property taxes relating to the principal
residence under §§ 163 and 164, respectively; and (2) participates in a State Program
in which the program payments can be used to pay interest on the home mortgage.
Notice 2017-40 provides that the safe harbor method is available for taxable years 2010
through 2021.
Section 164(b)(6)(B) provides that, in the case of an individual, for taxable years
beginning after December 31, 2017, and before January 1, 2026, the aggregate amount
of taxes taken into account under § 164(a)(1), (2), and (3) and § 164(b)(5) for any
taxable year shall not exceed $10,000 ($5,000 in the case of an individual filing a
separate return).
EXPLANATION OF SAFE HARBOR
This notice amplifies Notice 2017-40 to provide that the safe harbor, as modified,
is available even if the limitation in § 164(b)(6)(B) precludes a homeowner from
deducting all of the real property taxes imposed on the principal residence. The
amplification thus preserves the availability of the safe harbor computation for most
homeowners who participate in a State Program in which program payments can be
used to pay interest on a home mortgage. This notice also assists homeowners by
modifying the safe harbor method for taxable years 2018 through 2021 to permit a
homeowner to allocate home mortgage payments that the homeowner actually makes
during a taxable year first to deductible mortgage interest. This allocation will assist
homeowners using the safe harbor in determining what portion, if any, of payments
actually made is allocable to state and local property taxes and therefore subject to the
limitation in § 164(b)(6)(B).

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APPLICATION
For taxable years 2010 through 2021, a homeowner may deduct on his or her
federal income tax return (subject to the limitation in § 164(b)(6)(B) for taxable years
2018 through 2021) the lesser of—
• The sum of all payments on the home mortgage that the homeowner
actually makes during a taxable year to the mortgage servicer or the State
HFA; and
• The sum of amounts shown on Form 1098, Mortgage Interest Statement,
for mortgage interest received, real property taxes, and mortgage
insurance premiums (if deductible for the taxable year under
§ 163(h)(3)(E)).
This safe harbor method of computing a homeowner’s deduction applies for a
taxable year if (1) the homeowner meets the requirements of § 163 to deduct all of the
mortgage interest relating to the principal residence, (2) the homeowner meets the
requirements of § 164(a)(1) for deducting all the real property taxes (determined without
regard to § 164(b)(6)(B)), and (3) the homeowner participates in a State Program in
which the program payments can be used to pay interest on the home mortgage.
If the homeowner’s deduction, as provided above, is the sum of all payments
made by the homeowner during a taxable year, then the homeowner may first allocate
amounts paid to mortgage interest up to the amount shown on Form 1098. The
homeowner may then use any reasonable method to allocate the remaining balance of
the payments to real property taxes, mortgage insurance premiums, home insurance
premiums, and principal.

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Regardless of how a homeowner determines the deductible amount under this
safe harbor, any part of such amount that is allocated to state or local property taxes is
subject to the limitation in § 164(b)(6)(B).
EFFECT ON OTHER DOCUMENTS

Notice 2017-40 is amplified and modified.
DRAFTING INFORMATION
The principal author of this notice is Lisa Mojiri-Azad of the Office of Associate
Chief Counsel (Income Tax and Accounting). For further information regarding this
notice, contact Ms. Mojiri-Azad (202) 317-4718 (not a toll-free number).