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File an amended tax return online 2. File an amended tax return online Foreclosures and Repossessions Table of Contents Amount realized and ordinary income on a recourse debt. File an amended tax return online Amount realized on a nonrecourse debt. File an amended tax return online If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. File an amended tax return online The foreclosure or repossession is treated as a sale from which you may realize gain or loss. File an amended tax return online This is true even if you voluntarily return the property to the lender. File an amended tax return online If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you also may realize ordinary income from the cancellation of debt. File an amended tax return online You must report this income on your return unless certain exceptions or exclusions apply. File an amended tax return online See chapter 1 for more details. File an amended tax return online Borrower's gain or loss. File an amended tax return online You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale. File an amended tax return online The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). File an amended tax return online The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). File an amended tax return online For more information on figuring gain or loss from the sale of property, see Gain or Loss From Sales and Exchanges in Publication 544. File an amended tax return online You can use Table 1-1 to figure your ordinary income from the cancellation of debt and your gain or loss from a foreclosure or repossession. File an amended tax return online Amount realized and ordinary income on a recourse debt. File an amended tax return online If you are personally liable for the debt, the amount realized on the foreclosure or repossession includes the smaller of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The FMV of the transferred property. File an amended tax return online The amount realized also includes any proceeds you received from the foreclosure sale. File an amended tax return online If the FMV of the transferred property is less than the total outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, the difference is ordinary income from the cancellation of debt. File an amended tax return online You must report this income on your return unless certain exceptions or exclusions apply. File an amended tax return online See chapter 1 for more details. File an amended tax return online Example 1. File an amended tax return online Tara bought a new car for $15,000. File an amended tax return online She made a $2,000 downpayment and borrowed the remaining $13,000 from the dealer's credit company. File an amended tax return online Tara is personally liable for the loan (recourse debt) and the car is pledged as security for the loan. File an amended tax return online On August 1, 2013, the credit company repossessed the car because Tara had stopped making loan payments. File an amended tax return online The balance due after taking into account the payments Tara made was $10,000. File an amended tax return online The FMV of the car when it was repossessed was $9,000. File an amended tax return online On November 15, 2013, the credit company forgave the remaining $1,000 balance on the loan due to insufficient assets. File an amended tax return online In this case, the amount Tara realizes is $9,000. File an amended tax return online This is the smaller of: The $10,000 outstanding debt immediately before the repossession reduced by the $1,000 for which she remains personally liable immediately after the repossession ($10,000 − $1,000 = $9,000), or The $9,000 FMV of the car. File an amended tax return online Tara figures her gain or loss on the repossession by comparing the $9,000 amount realized with her $15,000 adjusted basis. File an amended tax return online She has a $6,000 nondeductible loss. File an amended tax return online After the cancellation of the remaining balance on the loan in November, Tara also has ordinary income from cancellation of debt in the amount of $1,000 (the remaining balance on the $10,000 loan after the $9,000 amount satisfied by the FMV of the repossessed car). File an amended tax return online Tara must report this $1,000 on her return unless one of the exceptions or exclusions described in chapter 1 applies. File an amended tax return online Example 2. File an amended tax return online Lili paid $200,000 for her home. File an amended tax return online She made a $15,000 downpayment and borrowed the remaining $185,000 from a bank. File an amended tax return online Lili is personally liable for the mortgage loan and the house secures the loan. File an amended tax return online In 2013, the bank foreclosed on the mortgage because Lili stopped making payments. File an amended tax return online When the bank foreclosed the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and Lili's adjusted basis was $175,000 due to a casualty loss she had deducted. File an amended tax return online At the time of the foreclosure, the bank forgave $2,000 of the $10,000 debt in excess of the FMV ($180,000 minus $170,000). File an amended tax return online She remained personally liable for the $8,000 balance. File an amended tax return online In this case, Lili has ordinary income from the cancellation of debt in the amount of $2,000. File an amended tax return online The $2,000 income from the cancellation of debt is figured by subtracting the $170,000 FMV of the house from the $172,000 difference between her total outstanding debt immediately before the transfer of property and the amount for which she remains personally liable immediately after the transfer ($180,000 minus $8,000). File an amended tax return online She is able to exclude the $2,000 of canceled debt from her income under the qualified principal residence indebtedness rules discussed earlier. File an amended tax return online Lili must also determine her gain or loss from the foreclosure. File an amended tax return online In this case, the amount that she realizes is $170,000. File an amended tax return online This is the smaller of: (a) the $180,000 outstanding debt immediately before the transfer reduced by the $8,000 for which she remains personally liable immediately after the transfer ($180,000 − $8,000 = $172,000) or (b) the $170,000 FMV of the house. File an amended tax return online Lili figures her gain or loss on the foreclosure by comparing the $170,000 amount realized with her $175,000 adjusted basis. File an amended tax return online She has a $5,000 nondeductible loss. File an amended tax return online Table 1-1. File an amended tax return online Worksheet for Foreclosures and Repossessions Part 1. File an amended tax return online Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). File an amended tax return online Otherwise, go to Part 2. File an amended tax return online 1. File an amended tax return online Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property 2. File an amended tax return online Enter the fair market value of the transferred property 3. File an amended tax return online Ordinary income from the cancellation of debt upon foreclosure or repossession. File an amended tax return online * Subtract line 2 from line 1. File an amended tax return online If less than zero, enter zero. File an amended tax return online Next, go to Part 2 Part 2. File an amended tax return online Gain or loss from foreclosure or repossession. File an amended tax return online 4. File an amended tax return online Enter the smaller of line 1 or line 2. File an amended tax return online If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property 5. File an amended tax return online Enter any proceeds you received from the foreclosure sale 6. File an amended tax return online Add line 4 and line 5 7. File an amended tax return online Enter the adjusted basis of the transferred property 8. File an amended tax return online Gain or loss from foreclosure or repossession. File an amended tax return online Subtract line 7 from line 6 * The income may not be taxable. File an amended tax return online See chapter 1 for more details. File an amended tax return online Amount realized on a nonrecourse debt. File an amended tax return online If you are not personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. File an amended tax return online This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer. File an amended tax return online Example 1. File an amended tax return online Tara bought a new car for $15,000. File an amended tax return online She made a $2,000 downpayment and borrowed the remaining $13,000 from the dealer's credit company. File an amended tax return online Tara is not personally liable for the loan (nonrecourse), but pledged the new car as security for the loan. File an amended tax return online On August 1, 2013, the credit company repossessed the car because Tara had stopped making loan payments. File an amended tax return online The balance due after taking into account the payments Tara made was $10,000. File an amended tax return online The FMV of the car when it was repossessed was $9,000. File an amended tax return online The amount Tara realized on the repossession is $10,000. File an amended tax return online That is the outstanding amount of debt immediately before the repossession, even though the FMV of the car is less than $10,000. File an amended tax return online Tara figures her gain or loss on the repossession by comparing the $10,000 amount realized with her $15,000 adjusted basis. File an amended tax return online Tara has a $5,000 nondeductible loss. File an amended tax return online Example 2. File an amended tax return online Lili paid $200,000 for her home. File an amended tax return online She made a $15,000 downpayment and borrowed the remaining $185,000 from a bank. File an amended tax return online She is not personally liable for the loan, but grants the bank a mortgage. File an amended tax return online The bank foreclosed on the mortgage because Lili stopped making payments. File an amended tax return online When the bank foreclosed on the mortgage, the balance due was $180,000, the FMV of the house was $170,000, and Lili's adjusted basis was $175,000 due to a casualty loss she had deducted. File an amended tax return online The amount Lili realized on the foreclosure is $180,000, the outstanding debt immediately before the foreclosure. File an amended tax return online She figures her gain or loss by comparing the $180,000 amount realized with her $175,000 adjusted basis. File an amended tax return online Lili has a $5,000 realized gain. File an amended tax return online See Publication 523 to figure and report any taxable amount. File an amended tax return online Forms 1099-A and 1099-C. File an amended tax return online A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A, Acquisition or Abandonment of Secured Property, showing information you need to figure your gain or loss. File an amended tax return online However, if the lender also cancels part of your debt and must file Form 1099-C, the lender can include the information about the foreclosure or repossession on that form instead of on Form 1099-A. File an amended tax return online The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. File an amended tax return online For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. File an amended tax return online Prev Up Next Home More Online Publications	Skip Navigation
File an amended tax return online 23. File an amended tax return online Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. File an amended tax return online Mortgage proceeds used for business or investment. File an amended tax return online Introduction This chapter discusses what interest expenses you can deduct. File an amended tax return online Interest is the amount you pay for the use of borrowed money. File an amended tax return online The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). File an amended tax return online Home mortgage interest, including certain points and mortgage insurance premiums. File an amended tax return online Investment interest. File an amended tax return online This chapter explains these deductions. File an amended tax return online It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. File an amended tax return online Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. File an amended tax return online Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). File an amended tax return online The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. File an amended tax return online You can deduct home mortgage interest if all the following conditions are met. File an amended tax return online You file Form 1040 and itemize deductions on Schedule A (Form 1040). File an amended tax return online The mortgage is a secured debt on a qualified home in which you have an ownership interest. File an amended tax return online (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. File an amended tax return online The term “qualified home” means your main home or second home. File an amended tax return online For details, see Publication 936. File an amended tax return online ) Both you and the lender must intend that the loan be repaid. File an amended tax return online Amount Deductible In most cases, you can deduct all of your home mortgage interest. File an amended tax return online How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. File an amended tax return online Fully deductible interest. File an amended tax return online If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. File an amended tax return online (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. File an amended tax return online ) The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). File an amended tax return online Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). File an amended tax return online Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). File an amended tax return online The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. File an amended tax return online See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. File an amended tax return online You can use Figure 23-A to check whether your home mortgage interest is fully deductible. File an amended tax return online Figure 23-A. File an amended tax return online Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. File an amended tax return online Figure 23-A. File an amended tax return online Is My Interest Fully Deductible? Limits on deduction. File an amended tax return online You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. File an amended tax return online If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. File an amended tax return online Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. File an amended tax return online It also describes certain special situations that may affect your deduction. File an amended tax return online Late payment charge on mortgage payment. File an amended tax return online You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. File an amended tax return online Mortgage prepayment penalty. File an amended tax return online If you pay off your home mortgage early, you may have to pay a penalty. File an amended tax return online You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. File an amended tax return online Sale of home. File an amended tax return online If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. File an amended tax return online Example. File an amended tax return online John and Peggy Harris sold their home on May 7. File an amended tax return online Through April 30, they made home mortgage interest payments of $1,220. File an amended tax return online The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. File an amended tax return online Their mortgage interest deduction is $1,270 ($1,220 + $50). File an amended tax return online Prepaid interest. File an amended tax return online If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. File an amended tax return online You can deduct in each year only the interest that qualifies as home mortgage interest for that year. File an amended tax return online However, there is an exception that applies to points, discussed later. File an amended tax return online Mortgage interest credit. File an amended tax return online You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. File an amended tax return online Figure the credit on Form 8396, Mortgage Interest Credit. File an amended tax return online If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. File an amended tax return online For more information on the credit, see chapter 37. File an amended tax return online Ministers' and military housing allowance. File an amended tax return online If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. File an amended tax return online Hardest Hit Fund and Emergency Homeowners' Loan Programs. File an amended tax return online You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. File an amended tax return online You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. File an amended tax return online You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. File an amended tax return online If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). File an amended tax return online However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. File an amended tax return online Mortgage assistance payments under section 235 of the National Housing Act. File an amended tax return online If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. File an amended tax return online You cannot deduct the interest that is paid for you. File an amended tax return online No other effect on taxes. File an amended tax return online Do not include these mortgage assistance payments in your income. File an amended tax return online Also, do not use these payments to reduce other deductions, such as real estate taxes. File an amended tax return online Divorced or separated individuals. File an amended tax return online If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. File an amended tax return online See the discussion of Payments for jointly-owned home in chapter 18. File an amended tax return online Redeemable ground rents. File an amended tax return online If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. File an amended tax return online Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. File an amended tax return online For more information, see Publication 936. File an amended tax return online Nonredeemable ground rents. File an amended tax return online Payments on a nonredeemable ground rent are not mortgage interest. File an amended tax return online You can deduct them as rent if they are a business expense or if they are for rental property. File an amended tax return online Reverse mortgages. File an amended tax return online A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. File an amended tax return online With a reverse mortgage, you retain title to your home. File an amended tax return online Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. File an amended tax return online Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. File an amended tax return online Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. File an amended tax return online Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. File an amended tax return online Rental payments. File an amended tax return online If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. File an amended tax return online This is true even if the settlement papers call them interest. File an amended tax return online You cannot deduct these payments as home mortgage interest. File an amended tax return online Mortgage proceeds invested in tax-exempt securities. File an amended tax return online You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. File an amended tax return online “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. File an amended tax return online Refunds of interest. File an amended tax return online If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. File an amended tax return online If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. File an amended tax return online However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. File an amended tax return online This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. File an amended tax return online If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. File an amended tax return online For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. File an amended tax return online For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. File an amended tax return online Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. File an amended tax return online Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. File an amended tax return online A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. File an amended tax return online See Points paid by the seller , later. File an amended tax return online General Rule You generally cannot deduct the full amount of points in the year paid. File an amended tax return online Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. File an amended tax return online See Deduction Allowed Ratably , next. File an amended tax return online For exceptions to the general rule, see Deduction Allowed in Year Paid , later. File an amended tax return online Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. File an amended tax return online You use the cash method of accounting. File an amended tax return online This means you report income in the year you receive it and deduct expenses in the year you pay them. File an amended tax return online Most individuals use this method. File an amended tax return online Your loan is secured by a home. File an amended tax return online (The home does not need to be your main home. File an amended tax return online ) Your loan period is not more than 30 years. File an amended tax return online If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. File an amended tax return online Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. File an amended tax return online Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. File an amended tax return online (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. File an amended tax return online ) Your loan is secured by your main home. File an amended tax return online (Your main home is the one you ordinarily live in most of the time. File an amended tax return online ) Paying points is an established business practice in the area where the loan was made. File an amended tax return online The points paid were not more than the points generally charged in that area. File an amended tax return online You use the cash method of accounting. File an amended tax return online This means you report income in the year you receive it and deduct expenses in the year you pay them. File an amended tax return online (If you want more information about this method, see Accounting Methods in chapter 1. File an amended tax return online ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. File an amended tax return online The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. File an amended tax return online The funds you provided are not required to have been applied to the points. File an amended tax return online They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. File an amended tax return online You cannot have borrowed these funds from your lender or mortgage broker. File an amended tax return online You use your loan to buy or build your main home. File an amended tax return online The points were computed as a percentage of the principal amount of the mortgage. File an amended tax return online The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. File an amended tax return online The points may be shown as paid from either your funds or the seller's. File an amended tax return online Figure 23-B. File an amended tax return online Are My Points Fully Deductible This Year? Please click here for the text description of the image. File an amended tax return online Figure 23-B. File an amended tax return online Are My Points Fully Deductible This Year? Note. File an amended tax return online If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. File an amended tax return online Home improvement loan. File an amended tax return online You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. File an amended tax return online Second home. File an amended tax return online You cannot fully deduct in the year paid points you pay on loans secured by your second home. File an amended tax return online You can deduct these points only over the life of the loan. File an amended tax return online Refinancing. File an amended tax return online Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. File an amended tax return online This is true even if the new mortgage is secured by your main home. File an amended tax return online However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. File an amended tax return online You can deduct the rest of the points over the life of the loan. File an amended tax return online Example 1. File an amended tax return online In 1998, Bill Fields got a mortgage to buy a home. File an amended tax return online In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. File an amended tax return online The mortgage is secured by his home. File an amended tax return online To get the new loan, he had to pay three points ($3,000). File an amended tax return online Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. File an amended tax return online Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. File an amended tax return online The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. File an amended tax return online Bill's first payment on the new loan was due July 1. File an amended tax return online He made six payments on the loan in 2013 and is a cash basis taxpayer. File an amended tax return online Bill used the funds from the new mortgage to repay his existing mortgage. File an amended tax return online Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. File an amended tax return online He cannot deduct all of the points in 2013. File an amended tax return online He can deduct two points ($2,000) ratably over the life of the loan. File an amended tax return online He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. File an amended tax return online The other point ($1,000) was a fee for services and is not deductible. File an amended tax return online Example 2. File an amended tax return online The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. File an amended tax return online Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. File an amended tax return online His deduction is $500 ($2,000 × 25%). File an amended tax return online Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. File an amended tax return online This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. File an amended tax return online The total amount Bill deducts in 2013 is $550 ($500 + $50). File an amended tax return online Special Situations This section describes certain special situations that may affect your deduction of points. File an amended tax return online Original issue discount. File an amended tax return online If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. File an amended tax return online This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. File an amended tax return online Amounts charged for services. File an amended tax return online Amounts charged by the lender for specific services connected to the loan are not interest. File an amended tax return online Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. File an amended tax return online You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. File an amended tax return online Points paid by the seller. File an amended tax return online The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. File an amended tax return online Treatment by seller. File an amended tax return online The seller cannot deduct these fees as interest. File an amended tax return online But they are a selling expense that reduces the amount realized by the seller. File an amended tax return online See chapter 15 for information on selling your home. File an amended tax return online Treatment by buyer. File an amended tax return online The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. File an amended tax return online If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. File an amended tax return online If any of those tests are not met, the buyer deducts the points over the life of the loan. File an amended tax return online For information about basis, see chapter 13. File an amended tax return online Funds provided are less than points. File an amended tax return online If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. File an amended tax return online In addition, you can deduct any points paid by the seller. File an amended tax return online Example 1. File an amended tax return online When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). File an amended tax return online You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. File an amended tax return online Of the $1,000 charged for points, you can deduct $750 in the year paid. File an amended tax return online You spread the remaining $250 over the life of the mortgage. File an amended tax return online Example 2. File an amended tax return online The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. File an amended tax return online In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). File an amended tax return online You spread the remaining $250 over the life of the mortgage. File an amended tax return online You must reduce the basis of your home by the $1,000 paid by the seller. File an amended tax return online Excess points. File an amended tax return online If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. File an amended tax return online You must spread any additional points over the life of the mortgage. File an amended tax return online Mortgage ending early. File an amended tax return online If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. File an amended tax return online However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. File an amended tax return online Instead, deduct the remaining balance over the term of the new loan. File an amended tax return online A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. File an amended tax return online Example. File an amended tax return online Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. File an amended tax return online He deducts $200 points per year. File an amended tax return online Through 2012, Dan has deducted $2,200 of the points. File an amended tax return online Dan prepaid his mortgage in full in 2013. File an amended tax return online He can deduct the remaining $800 of points in 2013. File an amended tax return online Limits on deduction. File an amended tax return online You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . File an amended tax return online See Publication 936 for details. File an amended tax return online Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. File an amended tax return online The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. File an amended tax return online Qualified mortgage insurance. File an amended tax return online Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). File an amended tax return online Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. File an amended tax return online If provided by the Rural Housing Service, it is commonly known as a guarantee fee. File an amended tax return online These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. File an amended tax return online Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. File an amended tax return online Special rules for prepaid mortgage insurance. File an amended tax return online Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. File an amended tax return online You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. File an amended tax return online No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. File an amended tax return online This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. File an amended tax return online See the Example below. File an amended tax return online Example. File an amended tax return online Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. File an amended tax return online Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. File an amended tax return online Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. File an amended tax return online Ryan's adjusted gross income (AGI) for 2012 is $76,000. File an amended tax return online Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. File an amended tax return online For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. File an amended tax return online In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). File an amended tax return online Limit on deduction. File an amended tax return online If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. File an amended tax return online See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. File an amended tax return online If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. File an amended tax return online Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. File an amended tax return online You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. File an amended tax return online A governmental unit is a person for purposes of furnishing the statement. File an amended tax return online The statement for each year should be sent to you by January 31 of the following year. File an amended tax return online A copy of this form will also be sent to the IRS. File an amended tax return online The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. File an amended tax return online However, it should not show any interest that was paid for you by a government agency. File an amended tax return online As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. File an amended tax return online However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. File an amended tax return online See Points , earlier, to determine whether you can deduct points not shown on Form 1098. File an amended tax return online Prepaid interest on Form 1098. File an amended tax return online If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. File an amended tax return online However, you cannot deduct the prepaid amount for January 2014 in 2013. File an amended tax return online (See Prepaid interest , earlier. File an amended tax return online ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. File an amended tax return online You will include the interest for January 2014 with the other interest you pay for 2014. File an amended tax return online See How To Report , later. File an amended tax return online Refunded interest. File an amended tax return online If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. File an amended tax return online See Refunds of interest , earlier. File an amended tax return online Mortgage insurance premiums. File an amended tax return online The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. File an amended tax return online See Mortgage Insurance Premiums, earlier. File an amended tax return online Investment Interest This section discusses interest expenses you may be able to deduct as an investor. File an amended tax return online If you borrow money to buy property you hold for investment, the interest you pay is investment interest. File an amended tax return online You can deduct investment interest subject to the limit discussed later. File an amended tax return online However, you cannot deduct interest you incurred to produce tax-exempt income. File an amended tax return online Nor can you deduct interest expenses on straddles. File an amended tax return online Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. File an amended tax return online Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. File an amended tax return online It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). File an amended tax return online Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). File an amended tax return online Partners, shareholders, and beneficiaries. File an amended tax return online To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. File an amended tax return online Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. File an amended tax return online Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. File an amended tax return online The allocation is not affected by the use of property that secures the debt. File an amended tax return online Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. File an amended tax return online You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. File an amended tax return online The interest carried over is treated as investment interest paid or accrued in that next year. File an amended tax return online You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. File an amended tax return online Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. File an amended tax return online Investment income. File an amended tax return online This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). File an amended tax return online Investment income does not include Alaska Permanent Fund dividends. File an amended tax return online It also does not include qualified dividends or net capital gain unless you choose to include them. File an amended tax return online Choosing to include qualified dividends. File an amended tax return online Investment income generally does not include qualified dividends, discussed in chapter 8. File an amended tax return online However, you can choose to include all or part of your qualified dividends in investment income. File an amended tax return online You make this choice by completing Form 4952, line 4g, according to its instructions. File an amended tax return online If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. File an amended tax return online Choosing to include net capital gain. File an amended tax return online Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). File an amended tax return online However, you can choose to include all or part of your net capital gain in investment income. File an amended tax return online You make this choice by completing Form 4952, line 4g, according to its instructions. File an amended tax return online If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. File an amended tax return online Before making either choice, consider the overall effect on your tax liability. File an amended tax return online Compare your tax if you make one or both of these choices with your tax if you do not. File an amended tax return online Investment income of child reported on parent's return. File an amended tax return online Investment income includes the part of your child's interest and dividend income that you choose to report on your return. File an amended tax return online If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. File an amended tax return online Child's qualified dividends. File an amended tax return online If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. File an amended tax return online However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. File an amended tax return online Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). File an amended tax return online Child's Alaska Permanent Fund dividends. File an amended tax return online If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. File an amended tax return online To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. File an amended tax return online Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. File an amended tax return online Subtract the result from the amount on Form 8814, line 12. File an amended tax return online Child's capital gain distributions. File an amended tax return online If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. File an amended tax return online However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. File an amended tax return online Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). File an amended tax return online Investment expenses. File an amended tax return online Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. File an amended tax return online Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. File an amended tax return online Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. File an amended tax return online Losses from passive activities. File an amended tax return online Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). File an amended tax return online See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. File an amended tax return online Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. File an amended tax return online Exception to use of Form 4952. File an amended tax return online You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. File an amended tax return online Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. File an amended tax return online You do not have any other deductible investment expenses. File an amended tax return online You have no carryover of investment interest expense from 2012. File an amended tax return online If you meet all of these tests, you can deduct all of your investment interest. File an amended tax return online More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. File an amended tax return online Items You Cannot Deduct Some interest payments are not deductible. File an amended tax return online Certain expenses similar to interest also are not deductible. File an amended tax return online Nondeductible expenses include the following items. File an amended tax return online Personal interest (discussed later). File an amended tax return online Service charges (however, see Other Expenses (Line 23) in chapter 28). File an amended tax return online Annual fees for credit cards. File an amended tax return online Loan fees. File an amended tax return online Credit investigation fees. File an amended tax return online Interest to purchase or carry tax-exempt securities. File an amended tax return online Penalties. File an amended tax return online You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. File an amended tax return online Personal Interest Personal interest is not deductible. File an amended tax return online Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. File an amended tax return online It includes the following items. File an amended tax return online Interest on car loans (unless you use the car for business). File an amended tax return online Interest on federal, state, or local income tax. File an amended tax return online Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. File an amended tax return online Late payment charges by a public utility. File an amended tax return online You may be able to deduct interest you pay on a qualified student loan. File an amended tax return online For details, see Publication 970, Tax Benefits for Education. File an amended tax return online Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. File an amended tax return online However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. File an amended tax return online You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. File an amended tax return online You do this by tracing disbursements of the debt proceeds to specific uses. File an amended tax return online For details on how to do this, see chapter 4 of Publication 535. File an amended tax return online How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. File an amended tax return online Where you deduct your interest expense generally depends on how you use the loan proceeds. File an amended tax return online See Table 23-1 for a summary of where to deduct your interest expense. File an amended tax return online Home mortgage interest and points. File an amended tax return online Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. File an amended tax return online If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. File an amended tax return online Attach a statement explaining the difference and print “See attached” next to line 10. File an amended tax return online Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. File an amended tax return online If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. File an amended tax return online The seller must give you this number and you must give the seller your TIN. File an amended tax return online A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. File an amended tax return online Failure to meet any of these requirements may result in a $50 penalty for each failure. File an amended tax return online The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. File an amended tax return online See Social Security Number (SSN) in chapter 1 for more information about TINs. File an amended tax return online If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. File an amended tax return online Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. File an amended tax return online More than one borrower. File an amended tax return online If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. File an amended tax return online Show how much of the interest each of you paid, and give the name and address of the person who received the form. File an amended tax return online Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. File an amended tax return online Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. File an amended tax return online Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. File an amended tax return online You should let each of the other borrowers know what his or her share is. File an amended tax return online Mortgage proceeds used for business or investment. File an amended tax return online If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. File an amended tax return online It shows where to deduct the part of your excess interest that is for those activities. File an amended tax return online Investment interest. File an amended tax return online Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. File an amended tax return online Amortization of bond premium. File an amended tax return online There are various ways to treat the premium you pay to buy taxable bonds. File an amended tax return online See Bond Premium Amortization in Publication 550. File an amended tax return online Income-producing rental or royalty interest. File an amended tax return online Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). File an amended tax return online Example. File an amended tax return online You rent out part of your home and borrow money to make repairs. File an amended tax return online You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). File an amended tax return online Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. File an amended tax return online Table 23-1. File an amended tax return online Where To Deduct Your Interest Expense IF you have . File an amended tax return online . File an amended tax return online . File an amended tax return online THEN deduct it on . File an amended tax return online . File an amended tax return online . File an amended tax return online AND for more information go to . File an amended tax return online . File an amended tax return online . File an amended tax return online deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. File an amended tax return online deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. File an amended tax return online deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. File an amended tax return online deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. File an amended tax return online deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. File an amended tax return online deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. File an amended tax return online deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. File an amended tax return online deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. File an amended tax return online deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. File an amended tax return online personal interest not deductible. File an amended tax return online Prev Up Next Home More Online Publications