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Interest on Home Mortgage

If you itemize deductions on Schedule A, you can deduct qualified mortgage interest on:

  • Your main home
  • A second home

You must be legally responsible for repaying the loan to deduct the loan interest.

You can increase the amount of your deduction by making extra mortgage payments in the year. Ex: If you pay your January mortgage payment in December, you'll have one extra month's  interest to deduct. This might work in your favor if you're grouping other deductions, like charitable donations.

Qualified mortgage interest

You can fully deduct most interest paid on home mortgages. However, there are exceptions. First, you have to separate qualified mortgage interest from personal interest. Mortgage interest is usually deductible, but personal interest isn't.

Home mortgage interest is interest on debt that's secured by a main home or second home. It's considered interest on either of these:

  • Acquisition debt
  • Home equity debt

Acquisition debt comes from buying, building, or improving a home. Home equity debt is from any purpose other than buying, building, or improving the home. However, home equity debt isn't a home-equity loan or line of credit. You secure a home equity loan with your home, but part of the money might be:

  • Acquisition debt if you use it to build an addition to your home
  • Home equity debt if you use it to pay for college or to buy a boat

You can fully deduct interest you pay on acquisition debt if the debt isn't more than these at any time during the year:

  • $1 million
  • $500,000 if married filing separately

You can also deduct the full amount of interest you pay on home equity debt if the debt anytime in the year isn't more than either:

  • $100,000 -- or $50,000 if married filing separately -- any time in the tax year
  • The difference between the fair market value (FMV) of your home and the remaining acquisition debt

Ex: In 2007, Chris bought his main home for $500,000. Four years later, he owed $400,000 on the original mortgage and took out a $60,000 home-equity loan. He used the proceeds to build a sun room and install an indoor pool. His home is now worth $700,000. He then decided to take out another $130,000 home equity loan and buy a sailboat.

On his 2013 return, he can deduct the interest he pays on:

  • $400,000 left on the original mortgage (acquisition debt)
  • $60,000 sunroom / pool loan (acquisition debt)
  • $100,000 of the sailboat debt (home equity debt). He can't deduct the interest paid on the remaining $30,000 of sailboat debt. It’s more than the $100,000 limit on home equity debt.

For Alternative Minimum Tax (AMT) purposes, you can't deduct interest you paid on loan proceeds you didn't use to buy, build, or improve your home (Ex: the sailboat debt above). Under mortgage interest rules, you can treat debt as acquisition debt if it's both:

  • Debt incurred before Oct. 14, 1987
  • Debt secured by a main or second home

This debt is referred to as grandfathered debt. It isn't subject to the $1 million cap. However, it reduces the $1 million and $100,000 limits if you incur any more debt on the home after Oct. 13, 1987. You might be offered a home equity loan or line of credit that's more than the FMV of your home. If so, you might not be able to deduct all of the interest on these home equity debts. Figuring your mortgage interest limits in this situation can be complex. If you want to learn more, talk to an H&R Block tax professional.

Deducting points

Points are also known as:

  • Loan origination fees
  • Maximum loan charges
  • Loan discounts

They're equal to mortgage interest paid up front when you receive your mortgage. One point equals 1% of the mortgage loan amount. To deduct points as mortgage interest, you must pay points only for the use of money. You can't deduct fees paid to cover services like:

  • Lender's appraisal fee
  • Notary fees
  • Mortgage note preparation

Since points represent interest paid in advance, you usually must deduct them over the life of the loan. However, you might be able to deduct all the points you gained to pay for buying or improving your main home. You would do this in the year you paid the points.

Deducting points in the year paid

You can fully deduct points in the year you paid them if all of these apply:

  • You're using a cash method.
  • You secured the mortgage loan with your main home.
  • The charging of points is an established business practice in the area.
  • The points paid weren't more than the number of points usually charged in the area.
  • The point weren't paid in place of amounts usually stated separately on the settlement statement, like:
    • Appraisal fees
    • Inspection fees
    • Title fees
    • Attorney fees
    • Property taxes
  • You didn't borrow the funds used to pay the points. You can't claim this deduction if the lender withheld the amount of the points from the loan proceeds.
  • You used the mortgage to buy or build your main home.
  • The settlement statement -- usually a HUD-1 -- clearly states the amount of points paid in connection with the closing.
  • The points are as a percentage of the amount of the mortgage's principal.

If you don't meet any of these conditions, you must deduct points over the life of the loan. If you want to learn what you can do with your points, see Publication 17: Your Federal Income Tax at www.irs.gov. See the flowchart in the Interest Expense chapter.

You can still deduct the points over the life of the loan even if both of these apply:

  • You qualify to deduct all points in the year you paid them.
  • You don't benefit from itemizing deductions for the mortgage's first year.

Ex: Avery bought his first home in November 2013, and he's filing as head of household. He paid three points ($3,000) to get a 30-year $100,000 mortgage, and he made his first mortgage payment on Jan. 1, 2014. For 2013, his itemized deductions -- including points paid -- total only $3,700. This is less than his standard deduction. Since his standard deduction is more, he should deduct his points over the life of the mortgage loan.

Deducting points over the life of the loan

You must deduct points over the life of a loan if either of these applies:

  • You paid points to refinance a home mortgage -- also known as a re-fi.
  • The points are for a second home you bought.

You can fully deduct the part of the points for the improvement. You can do this in the year you paid them with your own funds if both of these apply:

  • You use part of the refinanced mortgage proceeds to improve your main home.
  • You meet the first six points under "Deducting Points in the Year Paid" above.

You can deduct the rest of the points over the life of the loan.

Usually, you must amortize points deducted over the life of the loan using the original issue discount (OID) rules. Since OID rules are complex, you can use a simplified method. You can deduct the points equally over the life of the loan if all of these apply:

  • You use the cash method of accounting. This is the most common method.
  • You secured the loan with your home.
  • The loan's length isn't more than 30 years. (For 10 years, the loan's terms must be the same as other loans offered in your area for the same or longer period.)
  • Either:
    • The loan amount is $250,000 or less.
    • You paid no more than four points for a loan of 15 years or less. Or you paid no more than six points for a loan longer than 15 years.

Loan ends early

You might deduct points over the loan's life and pay the mortgage off early. If so, you can deduct the remaining points the year you pay off the mortgage. However, you might not be able to do this if you refinance your mortgage. You could refinance with a new lender and can deduct the remaining points when you pay off the loan. However, if you refinance with the same lender, you must deduct the remaining points over the life of the new loan. You might claim a deduction for points paid. If so, it's in addition to the deduction for the normal monthly interest payments you made on both loans.

Seller paid points

Points the seller pays for the buyer's loan are usually considered to be paid by the buyer. So, the buyer can deduct them. When you deduct points paid by the seller, you must subtract the amount of points the seller paid from your home's basis.

Reporting Home Mortgage Interest on Schedule A

If you pay $600 or more in mortgage interest, your lender must send you and the IRS a Form 1098: Mortgage Interest Statement. If your mortgage interest is less than $600, your lender isn’t required to send you this form. On Form 1098:

  • Box 1 - Interest you paid, not including points
  • Box 2 - Points you might be able to deduct. You usually see an amount in this box only if this is the mortgage you took out when you bought the home.
  • Box 3 - Refund of interest made if you overpaid the amount you owed
  • Box 4 - Other information, like:
    • Address of home being mortgaged
    • Amounts paid out of escrow for real-estate taxes and homeowner's insurance premiums

Put deductible interest (Box 1) and points (Box 2) reported on Form 1098 in Schedule A, Line 10. You might be able to deduct the Form 1098 amounts if they meet the guidelines listed previously. Enter these amounts on Schedule A:

  • Line 11 - Deductible mortgage interest you paid that wasn't reported on Form 1098
  • Line 12 - Points not reported to you on Form 1098

The recipient of the interest might be an individual -- not a business. If so, enter on the dotted lines below Line 11 the recipient's:

  • Name
  • Address
  • Identifying number - usually a Social Security number (SSN)

Rental property

You can deduct mortgage interest on rental property as an expense of renting the property. This mortgage interest is reported on Schedule E, not Schedule A. Also, you might have paid points when you took out the mortgage on your rental property. If so, you can't deduct the points in the year you paid. You must amortize the points over the life of the loan.

Personal and rental use of same property

You must prorate property expenses if both of these apply:

  • You personally use part of your property.
  • You rent out another part of your property that you don't personally use.

You should prorate expenses that apply to the entire property based on the percentage of space rented. These prorated expenses include mortgage interest and real-estate taxes.

You can only deduct the rental portion of expenses from rental income. If you itemize, you can use Schedule A to deduct the personal portion of:

  • Real-estate taxes
  • Mortgage interest
  • Casualty losses

You can't deduct the personal portion of other expenses, like utilities. To learn more, see the Rentals and Royalties tax tip.

Vacation Homes

If you didn't rent out your vacation home, you can fully deduct the mortgage interest on it. Use Schedule A to deduct the interest. If you personally used the vacation home and rented it out for fewer than 15 days:

  • You don't need to report the rental income.
  • You can deduct the mortgage interest you paid.

If you rented out the home for 15 days or more:

  • You must report the rental income
  • You can deduct expenses related to renting the property.

Use these schedules to report your mortgages:

  • Schedule E - Report the mortgage interest for the time you rented out the property.
  • Schedule A - Deduct the remainder of the mortgage interest you paid as a deduction.

The split is based on a ratio between the number of days rented and either of these:

  • Number of days you owned the home in the year
  • Number of days you used the home for personal purposes

If you want to learn more, see Personal Use of Vacation Homes in the Rentals and Royalties tax tip.

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