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 Previous Page: Publication 17 - Your Federal Income Tax - Where To Deduct Next Page: Publication 17 - Your Federal Income Tax - Investment InterestUse to find additional instances of index items. |
Taxmap/pub17/p17-124.htm#TXMP22240b7a Chapter 25 |
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Taxmap/pub17/p17-124.htm#TXMP63f2540e |
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Personal interest is not deductible. Examples of personal interest include interest on a loan to purchase an automobile for personal use and credit card and installment interest incurred for personal expenses.
But you may be able to deduct interest you pay on a qualified student loan. For details, see Publication 970, Tax Benefits for Education.
If your adjusted gross income is more than $142,700 ($71,350 if you are married filing separately), the overall amount of your itemized deductions may be limited. See chapter 31 for more information about this limit.
This chapter discusses interest. Interest is the amount you pay for the use of borrowed money.
The types of interest you can deduct as itemized deductions on Schedule A (Form 1040) are:
Use Table 25-1 to find out where to get more information on various types of interest, including investment interest.
You may want to see:
Taxmap/pub17/p17-124.htm#TXMP4d74d151 |
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Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
You can deduct home mortgage interest only if you meet all the following conditions.
Taxmap/pub17/p17-124.htm#TXMP5e4dc0ab |
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In most cases, you will be able to deduct all of your home mortgage interest. Whether you can deduct all of it depends on the date you took out the mortgage, the amount of the mortgage, and your use of its proceeds.
Taxmap/pub17/p17-124.htm#TXMP6fd524a1 |
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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. (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.)
The three categories are:
The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.
See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt.
You can use Figure 25-A to check whether your home mortgage interest is fully deductible.
Figure 25-A. Is My Interest Fully Deductible? Taxmap/pub17/p17-124.htm#TXMP5625987a |
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You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed above. If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct.
Taxmap/pub17/p17-124.htm#TXMP2be2faeb |
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This section describes certain items that can be included as home mortgage interest and others that cannot. It also describes certain special situations that may affect your deduction.
Taxmap/pub17/p17-124.htm#TXMP5415cf67 |
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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.
Taxmap/pub17/p17-124.htm#TXMP054cff4c |
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If you pay off your home mortgage early, you may have to pay a penalty. 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.
Taxmap/pub17/p17-124.htm#TXMP35ddf614 |
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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.
John and Peggy Harris sold their home on May 7. Through April 30, they made home mortgage interest payments of $1,220. 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. Their mortgage interest deduction is $1,270 ($1,220 + $50).
Taxmap/pub17/p17-124.htm#TXMP0dc3549f |
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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. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, see Points, later.
Taxmap/pub17/p17-124.htm#TXMP222f1ebc |
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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. Figure the credit on Form 8396, Mortgage Interest Credit. If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit.
For more information on the credit, see chapter 39.
Taxmap/pub17/p17-124.htm#TXMP284b94b1 |
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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.
Taxmap/pub17/p17-124.htm#TXMP1fb45501 |
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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. You cannot deduct the interest that is paid for you.
Taxmap/pub17/p17-124.htm#TXMP061d3662 No other effect on taxes. |
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Do not include these mortgage assistance payments in your income. Also, do not use these payments to reduce other deductions, such as real estate taxes.
Taxmap/pub17/p17-124.htm#TXMP251da476 |
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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. See the discussion of Payments for jointly-owned home in chapter 20.
Taxmap/pub17/p17-124.htm#TXMP5bda4a0e |
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If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest.
Payments made to end the lease and to buy the lessor's entire interest in the land are not ground rents. You cannot deduct them. For more information, see Publication 936.
Taxmap/pub17/p17-124.htm#TXMP6a7becc2 Nonredeemable ground rent. |
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Payments on a nonredeemable ground rent are not mortgage interest. You can deduct them as rent if they are a business expense or if they are for rental property.
Taxmap/pub17/p17-124.htm#TXMP3b920c0d |
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If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. This is true even if the settlement papers call them interest. You cannot deduct these payments as home mortgage interest.
Taxmap/pub17/p17-124.htm#TXMP311078e7 |
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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. "Grandfathered debt" and "home equity debt" are defined earlier under Amount Deductible.
Taxmap/pub17/p17-124.htm#TXMP17d5d782 |
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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. 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. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage.
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. For information about Form 1098, see Mortgage Interest Statement, later.
For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 13.
Taxmap/pub17/p17-124.htm#TXMP263943e2 |
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The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. See Points paid by the seller, later.
Taxmap/pub17/p17-124.htm#TXMP3dbbbe80 |
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You generally cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. However, see Deduction allowed in year paid, and Home improvement loan.
Taxmap/pub17/p17-124.htm#TXMP41a93454 |
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You can fully deduct points in the year paid if you meet all the following tests. (You can use Figure 25-B as a quick guide to see whether your points are fully deductible in the year paid.)
Figure 25–B. Are My Points Fully Deductible This Year? Taxmap/pub17/p17-124.htm#TXMP0f008290 Home improvement loan. |
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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.
 | Second home. You cannot fully deduct in the year paid points you pay on loans secured by your second home. You can deduct these points only over the life of the loan. |
Taxmap/pub17/p17-124.htm#TXMP14f205d8 |
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Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. This is true even if the new mortgage is secured by your main home.
However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six 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. You can deduct the rest of the points over the life of the loan.
In 1992, Bill Fields got a mortgage to buy a home. In 2004, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. The mortgage is secured by his home. To get the new loan, he had to pay three points ($3,000). 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. Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Bill's first payment on the new loan was due July 1. He made six payments on the loan in 2004 and is a cash basis taxpayer.
Bill used the funds from the new mortgage to repay his existing mortgage. 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. He cannot deduct all of the points in 2004. He can deduct two points ($2,000) ratably over the life of the loan. He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2004. The other point ($1,000) was a fee for services and is not deductible.
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. Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2004. His deduction is $500 ($2,000 × 25%).
Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2004. The total amount Bill deducts in 2004 is $550 ($500 + $50).
Taxmap/pub17/p17-124.htm#TXMP07484782 |
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If you do not meet the tests above under Deduction allowed in year paid, 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.
Taxmap/pub17/p17-124.htm#TXMP61aa6b48 Original issue discount. |
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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. This reduction results in original issue discount, which is discussed in chapter 5 of Publication 535.
Taxmap/pub17/p17-124.htm#TXMP173e30c0 |
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Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are:
Taxmap/pub17/p17-124.htm#TXMP23ed787f |
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The term "points" includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.
Taxmap/pub17/p17-124.htm#TXMP6636e0ec Treatment by seller. |
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The seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller. See chapter 16 for information on the sale of your home.
Taxmap/pub17/p17-124.htm#TXMP68069ddc Treatment by buyer. |
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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. If all the tests under Deduction allowed in year paid, earlier, are met, the buyer can deduct the points in the year paid. If any of those tests is not met, the buyer deducts the points over the life of the loan.
For information about basis, see chapter 14.
Taxmap/pub17/p17-124.htm#TXMP0383c732 |
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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. In addition, you can deduct any points paid by the seller.
When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Of the $1,000 charged for points, you can deduct $750 in the year paid. You spread the remaining $250 over the life of the mortgage.
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. In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). You spread the remaining $250 over the life of the mortgage. You must reduce the basis of your home by the $1,000 paid by the seller.
Taxmap/pub17/p17-124.htm#TXMP7f993d8e |
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If you meet all the tests in Deduction allowed in year paid, earlier, except that the points paid were more than are generally paid in your area (test 3), you deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.
Taxmap/pub17/p17-124.htm#TXMP5e73b97f |
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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. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.
A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.
Dan paid $3,000 in points in 1994 that he had to spread out over the 15-year life of the mortgage. He had deducted $2,000 of these points through 2003.
Dan prepaid his mortgage in full in 2004. He can deduct the remaining $1,000 of points in 2004.
Taxmap/pub17/p17-124.htm#TXMP0f28d201 |
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You cannot fully deduct points on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest. See Publication 936 for details.
Taxmap/pub17/p17-124.htm#TXMP76e0202d |
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If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098, Mortgage Interest Statement, or a similar statement from the mortgage holder. 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. A governmental unit is a person for purposes of furnishing the statement.
The statement for each year should be sent to you by January 31 of the following year. A copy of this form will also be sent to the IRS.
The statement will show the total interest you paid during the year. If you purchased a main home during the year, it will also show the deductible points paid during the year, including seller-paid points. However, it should not show any interest that was paid for you by a government agency.
As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. See Points, earlier, to determine whether you can deduct points not shown on Form 1098.
Taxmap/pub17/p17-124.htm#TXMP0be6a4ce |
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If you prepaid interest in 2004 that accrued in full by January 15, 2005, this prepaid interest may be included in box 1 of Form 1098. However, you cannot deduct the prepaid amount for January 2005 in 2004. (See Prepaid interest, earlier.) You will have to figure the interest that accrued for 2005 and subtract it from the amount in box 1. You will include the interest for January 2005 with the other interest you pay for 2005. See How To Report, later.
Taxmap/pub17/p17-124.htm#TXMP7cdbf016 |
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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. See Refunds of interest, earlier.
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Publication 17 - Your Federal Income Tax - Where To DeductNext Page:
Publication 17 - Your Federal Income Tax - Investment Interest Use
to find additional instances of index items. |
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