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Http freefile irs gov Publication 936 - Main Content Table of Contents Part I. Http freefile irs gov Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. Http freefile irs gov Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. Http freefile irs gov Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Http freefile irs gov It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Http freefile irs gov Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Http freefile irs gov The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Http freefile irs gov You can deduct home mortgage interest if all the following conditions are met. Http freefile irs gov You file Form 1040 and itemize deductions on Schedule A (Form 1040). Http freefile irs gov The mortgage is a secured debt on a qualified home in which you have an ownership interest. Http freefile irs gov Secured Debt and Qualified Home are explained later. Http freefile irs gov  Both you and the lender must intend that the loan be repaid. Http freefile irs gov Fully deductible interest. Http freefile irs gov   In most cases, you can deduct all of your home mortgage interest. Http freefile irs gov How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Http freefile irs gov   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. Http freefile irs gov (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. Http freefile irs gov ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. Http freefile irs gov   The three categories are as follows. Http freefile irs gov Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Http freefile irs gov 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). Http freefile irs gov 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). Http freefile irs gov The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Http freefile irs gov   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Http freefile irs gov    You can use Figure A to check whether your home mortgage interest is fully deductible. Http freefile irs gov This image is too large to be displayed in the current screen. Http freefile irs gov Please click the link to view the image. Http freefile irs gov Figure A. Http freefile irs gov Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Http freefile irs gov A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. Http freefile irs gov In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Http freefile irs gov If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Http freefile irs gov In this publication, mortgage will refer to secured debt. Http freefile irs gov Debt not secured by home. Http freefile irs gov   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). Http freefile irs gov   A debt is not secured by your home if it once was, but is no longer secured by your home. Http freefile irs gov Wraparound mortgage. Http freefile irs gov   This is not a secured debt unless it is recorded or otherwise perfected under state law. Http freefile irs gov Example. Http freefile irs gov Beth owns a home subject to a mortgage of $40,000. Http freefile irs gov She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Http freefile irs gov Beth continues to make the payments on the $40,000 note. Http freefile irs gov John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Http freefile irs gov Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Http freefile irs gov Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Http freefile irs gov Choice to treat the debt as not secured by your home. Http freefile irs gov   You can choose to treat any debt secured by your qualified home as not secured by the home. Http freefile irs gov This treatment begins with the tax year for which you make the choice and continues for all later tax years. Http freefile irs gov You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Http freefile irs gov   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. Http freefile irs gov This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Http freefile irs gov Cooperative apartment owner. Http freefile irs gov   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. Http freefile irs gov Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Http freefile irs gov This means your main home or your second home. Http freefile irs gov A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Http freefile irs gov The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Http freefile irs gov Otherwise, it is considered personal interest and is not deductible. Http freefile irs gov Main home. Http freefile irs gov   You can have only one main home at any one time. Http freefile irs gov This is the home where you ordinarily live most of the time. Http freefile irs gov Second home. Http freefile irs gov   A second home is a home that you choose to treat as your second home. Http freefile irs gov Second home not rented out. Http freefile irs gov   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. Http freefile irs gov You do not have to use the home during the year. Http freefile irs gov Second home rented out. Http freefile irs gov   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. Http freefile irs gov You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. Http freefile irs gov If you do not use the home long enough, it is considered rental property and not a second home. Http freefile irs gov For information on residential rental property, see Publication 527. Http freefile irs gov More than one second home. Http freefile irs gov   If you have more than one second home, you can treat only one as the qualified second home during any year. Http freefile irs gov However, you can change the home you treat as a second home during the year in the following situations. Http freefile irs gov If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. Http freefile irs gov If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. Http freefile irs gov If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. Http freefile irs gov Divided use of your home. Http freefile irs gov   The only part of your home that is considered a qualified home is the part you use for residential living. Http freefile irs gov If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. Http freefile irs gov You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Http freefile irs gov Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. Http freefile irs gov (See Home Acquisition Debt in Part II. Http freefile irs gov ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Http freefile irs gov Renting out part of home. Http freefile irs gov   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. Http freefile irs gov The rented part of your home is used by the tenant primarily for residential living. Http freefile irs gov The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Http freefile irs gov You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. Http freefile irs gov If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Http freefile irs gov Office in home. Http freefile irs gov   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Http freefile irs gov It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Http freefile irs gov Home under construction. Http freefile irs gov   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. Http freefile irs gov   The 24-month period can start any time on or after the day construction begins. Http freefile irs gov Home destroyed. Http freefile irs gov   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. Http freefile irs gov This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Http freefile irs gov   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. Http freefile irs gov   This rule applies to your main home and to a second home that you treat as a qualified home. Http freefile irs gov Time-sharing arrangements. Http freefile irs gov   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Http freefile irs gov A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. Http freefile irs gov Rental of time-share. Http freefile irs gov   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. Http freefile irs gov See Second home rented out , earlier, for the use requirement. Http freefile irs gov To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. Http freefile irs gov Married taxpayers. Http freefile irs gov   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Http freefile irs gov Separate returns. Http freefile irs gov   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. Http freefile irs gov However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Http freefile irs gov Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Http freefile irs gov It also describes certain special situations that may affect your deduction. Http freefile irs gov Late payment charge on mortgage payment. Http freefile irs gov   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. Http freefile irs gov Mortgage prepayment penalty. Http freefile irs gov   If you pay off your home mortgage early, you may have to pay a penalty. Http freefile irs gov 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. Http freefile irs gov Sale of home. Http freefile irs gov   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 the sale. Http freefile irs gov Example. Http freefile irs gov John and Peggy Harris sold their home on May 7. Http freefile irs gov Through April 30, they made home mortgage interest payments of $1,220. Http freefile irs gov 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. Http freefile irs gov Their mortgage interest deduction is $1,270 ($1,220 + $50). Http freefile irs gov Prepaid interest. Http freefile irs gov   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. Http freefile irs gov You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Http freefile irs gov However, there is an exception that applies to points, discussed later. Http freefile irs gov Mortgage interest credit. Http freefile irs gov    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. Http freefile irs gov Figure the credit on Form 8396, Mortgage Interest Credit. Http freefile irs gov If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Http freefile irs gov   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Http freefile irs gov Ministers' and military housing allowance. Http freefile irs gov   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. Http freefile irs gov Hardest Hit Fund and Emergency Homeowners' Loan Programs. Http freefile irs gov   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. Http freefile irs gov 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. Http freefile irs gov 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. Http freefile irs gov 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 (other information including real property taxes paid). Http freefile irs gov 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. Http freefile irs gov Mortgage assistance payments under section 235 of the National Housing Act. Http freefile irs gov   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. Http freefile irs gov You cannot deduct the interest that is paid for you. Http freefile irs gov No other effect on taxes. Http freefile irs gov   Do not include these mortgage assistance payments in your income. Http freefile irs gov Also, do not use these payments to reduce other deductions, such as real estate taxes. Http freefile irs gov Divorced or separated individuals. Http freefile irs gov   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. Http freefile irs gov See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Http freefile irs gov Redeemable ground rents. Http freefile irs gov   In some states (such as Maryland), you can buy your home subject to a ground rent. Http freefile irs gov A ground rent is an obligation you assume to pay a fixed amount per year on the property. Http freefile irs gov Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Http freefile irs gov   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Http freefile irs gov   A ground rent is a redeemable ground rent if all of the following are true. Http freefile irs gov Your lease, including renewal periods, is for more than 15 years. Http freefile irs gov You can freely assign the lease. Http freefile irs gov You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specific amount. Http freefile irs gov The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Http freefile irs gov   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Http freefile irs gov Nonredeemable ground rents. Http freefile irs gov   Payments on a nonredeemable ground rent are not mortgage interest. Http freefile irs gov You can deduct them as rent if they are a business expense or if they are for rental property. Http freefile irs gov Reverse mortgages. Http freefile irs gov   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. Http freefile irs gov With a reverse mortgage, you retain title to your home. Http freefile irs gov 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. Http freefile irs gov Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Http freefile irs gov Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Http freefile irs gov Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Http freefile irs gov Rental payments. Http freefile irs gov   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Http freefile irs gov This is true even if the settlement papers call them interest. Http freefile irs gov You cannot deduct these payments as home mortgage interest. Http freefile irs gov Mortgage proceeds invested in tax-exempt securities. Http freefile irs gov   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. Http freefile irs gov “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Http freefile irs gov Refunds of interest. Http freefile irs gov   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. Http freefile irs gov 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. Http freefile irs gov However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Http freefile irs gov This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Http freefile irs gov If you need to include the refund in income, report it on Form 1040, line 21. Http freefile irs gov   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. Http freefile irs gov For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Http freefile irs gov   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Http freefile irs gov Cooperative apartment owner. Http freefile irs gov   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Http freefile irs gov The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Http freefile irs gov   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Http freefile irs gov Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Http freefile irs gov Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Http freefile irs gov This image is too large to be displayed in the current screen. Http freefile irs gov Please click the link to view the image. Http freefile irs gov Figure B. Http freefile irs gov Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Http freefile irs gov See Points paid by the seller , later. Http freefile irs gov General Rule You generally cannot deduct the full amount of points in the year paid. Http freefile irs gov Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Http freefile irs gov See Deduction Allowed Ratably , next. Http freefile irs gov For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Http freefile irs gov 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. Http freefile irs gov You use the cash method of accounting. Http freefile irs gov This means you report income in the year you receive it and deduct expenses in the year you pay them. Http freefile irs gov Most individuals use this method. Http freefile irs gov Your loan is secured by a home. Http freefile irs gov (The home does not need to be your main home. Http freefile irs gov ) Your loan period is not more than 30 years. Http freefile irs gov 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. Http freefile irs gov 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. Http freefile irs gov Example. Http freefile irs gov You use the cash method of accounting. Http freefile irs gov In 2013, you took out a $100,000 loan payable over 20 years. Http freefile irs gov The terms of the loan are the same as for other 20-year loans offered in your area. Http freefile irs gov You paid $4,800 in points. Http freefile irs gov You made 3 monthly payments on the loan in 2013. Http freefile irs gov You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Http freefile irs gov In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Http freefile irs gov Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Http freefile irs gov (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Http freefile irs gov ) Your loan is secured by your main home. Http freefile irs gov (Your main home is the one you ordinarily live in most of the time. Http freefile irs gov ) Paying points is an established business practice in the area where the loan was made. Http freefile irs gov The points paid were not more than the points generally charged in that area. Http freefile irs gov You use the cash method of accounting. Http freefile irs gov This means you report income in the year you receive it and deduct expenses in the year you pay them. Http freefile irs gov Most individuals use this method. Http freefile irs gov 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. Http freefile irs gov The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Http freefile irs gov The funds you provided are not required to have been applied to the points. Http freefile irs gov They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Http freefile irs gov You cannot have borrowed these funds from your lender or mortgage broker. Http freefile irs gov You use your loan to buy or build your main home. Http freefile irs gov The points were computed as a percentage of the principal amount of the mortgage. Http freefile irs gov The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Http freefile irs gov The points may be shown as paid from either your funds or the seller's. Http freefile irs gov Note. Http freefile irs gov 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. Http freefile irs gov Home improvement loan. Http freefile irs gov   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. Http freefile irs gov Second home. Http freefile irs gov You cannot fully deduct in the year paid points you pay on loans secured by your second home. Http freefile irs gov You can deduct these points only over the life of the loan. Http freefile irs gov Refinancing. Http freefile irs gov   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Http freefile irs gov This is true even if the new mortgage is secured by your main home. Http freefile irs gov   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 , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Http freefile irs gov You can deduct the rest of the points over the life of the loan. Http freefile irs gov Example 1. Http freefile irs gov In 1998, Bill Fields got a mortgage to buy a home. Http freefile irs gov In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Http freefile irs gov The mortgage is secured by his home. Http freefile irs gov To get the new loan, he had to pay three points ($3,000). Http freefile irs gov 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. Http freefile irs gov Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Http freefile irs gov The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Http freefile irs gov Bill's first payment on the new loan was due July 1. Http freefile irs gov He made six payments on the loan in 2013 and is a cash basis taxpayer. Http freefile irs gov Bill used the funds from the new mortgage to repay his existing mortgage. Http freefile irs gov 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. Http freefile irs gov He cannot deduct all of the points in 2013. Http freefile irs gov He can deduct two points ($2,000) ratably over the life of the loan. Http freefile irs gov He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Http freefile irs gov The other point ($1,000) was a fee for services and is not deductible. Http freefile irs gov Example 2. Http freefile irs gov 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. Http freefile irs gov Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Http freefile irs gov His deduction is $500 ($2,000 × 25%). Http freefile irs gov Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Http freefile irs gov This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Http freefile irs gov The total amount Bill deducts in 2013 is $550 ($500 + $50). Http freefile irs gov Special Situations This section describes certain special situations that may affect your deduction of points. Http freefile irs gov Original issue discount. Http freefile irs gov   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. Http freefile irs gov This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Http freefile irs gov Amounts charged for services. Http freefile irs gov    Amounts charged by the lender for specific services connected to the loan are not interest. Http freefile irs gov Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Http freefile irs gov  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Http freefile irs gov Points paid by the seller. Http freefile irs gov   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Http freefile irs gov Treatment by seller. Http freefile irs gov   The seller cannot deduct these fees as interest. Http freefile irs gov But they are a selling expense that reduces the amount realized by the seller. Http freefile irs gov See Publication 523 for information on selling your home. Http freefile irs gov Treatment by buyer. Http freefile irs gov   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. Http freefile irs gov If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Http freefile irs gov If any of those tests are not met, the buyer deducts the points over the life of the loan. Http freefile irs gov   If you need information about the basis of your home, see Publication 523 or Publication 530. Http freefile irs gov Funds provided are less than points. Http freefile irs gov   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. Http freefile irs gov In addition, you can deduct any points paid by the seller. Http freefile irs gov Example 1. Http freefile irs gov When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Http freefile irs gov You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Http freefile irs gov Of the $1,000 charged for points, you can deduct $750 in the year paid. Http freefile irs gov You spread the remaining $250 over the life of the mortgage. Http freefile irs gov Example 2. Http freefile irs gov 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. Http freefile irs gov In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Http freefile irs gov You spread the remaining $250 over the life of the mortgage. Http freefile irs gov You must reduce the basis of your home by the $1,000 paid by the seller. Http freefile irs gov Excess points. Http freefile irs gov   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. Http freefile irs gov You must spread any additional points over the life of the mortgage. Http freefile irs gov Mortgage ending early. Http freefile irs gov   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. Http freefile irs gov However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Http freefile irs gov Instead, deduct the remaining balance over the term of the new loan. Http freefile irs gov   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Http freefile irs gov Example. Http freefile irs gov Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Http freefile irs gov He deducts $200 points per year. Http freefile irs gov Through 2012, Dan has deducted $2,200 of the points. Http freefile irs gov Dan prepaid his mortgage in full in 2013. Http freefile irs gov He can deduct the remaining $800 of points in 2013. Http freefile irs gov Limits on deduction. Http freefile irs gov   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Http freefile irs gov See the Table 1 Instructions for line 10. Http freefile irs gov Form 1098. Http freefile irs gov    The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Http freefile irs gov See Form 1098, Mortgage Interest Statement , later. Http freefile irs gov Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Http freefile irs gov The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Http freefile irs gov Qualified mortgage insurance. Http freefile irs gov   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). Http freefile irs gov   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Http freefile irs gov If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Http freefile irs gov The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. Http freefile irs gov These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Http freefile irs gov Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Http freefile irs gov Special rules for prepaid mortgage insurance. Http freefile irs gov   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Http freefile irs gov 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. Http freefile irs gov No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Http freefile irs gov This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Http freefile irs gov Example. Http freefile irs gov Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Http freefile irs gov Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Http freefile irs gov 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. Http freefile irs gov Ryan's adjusted gross income (AGI) for 2012 is $76,000. Http freefile irs gov Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Http freefile irs gov For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Http freefile irs gov 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). Http freefile irs gov Limit on deduction. Http freefile irs gov   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. Http freefile irs gov 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. Http freefile irs gov If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Http freefile irs gov Form 1098. Http freefile irs gov   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. Http freefile irs gov See Form 1098, Mortgage Interest Statement, next. Http freefile irs gov 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. Http freefile irs gov You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. Http freefile irs gov A governmental unit is a person for purposes of furnishing the statement. Http freefile irs gov The statement for each year should be sent to you by January 31 of the following year. Http freefile irs gov A copy of this form will also be sent to the IRS. Http freefile irs gov 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. Http freefile irs gov However, it should not show any interest that was paid for you by a government agency. Http freefile irs gov As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Http freefile irs gov However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Http freefile irs gov See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Http freefile irs gov Prepaid interest on Form 1098. Http freefile irs gov   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. Http freefile irs gov However, you cannot deduct the prepaid amount for January 2014 in 2013. Http freefile irs gov (See Prepaid interest , earlier. Http freefile irs gov ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Http freefile irs gov You will include the interest for January 2014 with other interest you pay for 2014. Http freefile irs gov Refunded interest. Http freefile irs gov   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. Http freefile irs gov See Refunds of interest , earlier. Http freefile irs gov Mortgage insurance premiums. Http freefile irs gov   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Http freefile irs gov See Mortgage Insurance Premiums , earlier. Http freefile irs gov How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Http freefile irs gov 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. Http freefile irs gov Attach a statement explaining the difference and print “See attached” next to line 10. Http freefile irs gov Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Http freefile irs gov 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. Http freefile irs gov The seller must give you this number and you must give the seller your TIN. Http freefile irs gov A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Http freefile irs gov Failure to meet any of these requirements may result in a $50 penalty for each failure. Http freefile irs gov 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. Http freefile irs gov 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. Http freefile irs gov Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Http freefile irs gov More than one borrower. Http freefile irs gov   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. Http freefile irs gov Show how much of the interest each of you paid, and give the name and address of the person who received the form. Http freefile irs gov Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Http freefile irs gov Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Http freefile irs gov   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. Http freefile irs gov Let each of the other borrowers know what his or her share is. Http freefile irs gov Mortgage proceeds used for business or investment. Http freefile irs gov   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. Http freefile irs gov It shows where to deduct the part of your excess interest that is for those activities. Http freefile irs gov The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. Http freefile irs gov Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Http freefile irs gov This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Http freefile irs gov Cooperative housing corporation. Http freefile irs gov   This is a corporation that meets all of the following conditions. Http freefile irs gov Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. Http freefile irs gov Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Http freefile irs gov For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Http freefile irs gov At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. Http freefile irs gov At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. Http freefile irs gov Stock used to secure debt. Http freefile irs gov   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). Http freefile irs gov However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. Http freefile irs gov See chapter 4 of Publication 535 for details on these rules. Http freefile irs gov Figuring deductible home mortgage interest. Http freefile irs gov   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. Http freefile irs gov The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. Http freefile irs gov   Figure your share of this interest by multiplying the total by the following fraction. Http freefile irs gov      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Http freefile irs gov   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. Http freefile irs gov The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Http freefile irs gov (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Http freefile irs gov ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. Http freefile irs gov Form 1098. Http freefile irs gov    The cooperative should give you a Form 1098 showing your share of the interest. Http freefile irs gov Use the rules in this publication to determine your deductible mortgage interest. Http freefile irs gov Part II. Http freefile irs gov Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Http freefile irs gov These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . Http freefile irs gov Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. Http freefile irs gov This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. Http freefile irs gov Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Http freefile irs gov Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). Http freefile irs gov It also must be secured by that home. Http freefile irs gov If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Http freefile irs gov The additional debt may qualify as home equity debt (discussed later). Http freefile irs gov Home acquisition debt limit. Http freefile irs gov   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Http freefile irs gov This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Http freefile irs gov Debt over this limit may qualify as home equity debt (also discussed later). Http freefile irs gov Refinanced home acquisition debt. Http freefile irs gov   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Http freefile irs gov However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Http freefile irs gov Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). Http freefile irs gov Mortgage that qualifies later. Http freefile irs gov   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Http freefile irs gov For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. Http freefile irs gov However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Http freefile irs gov Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Http freefile irs gov However, if the property later becomes a qualified home, the debt may qualify after that time. Http freefile irs gov Mortgage treated as used to buy, build, or improve home. Http freefile irs gov   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. Http freefile irs gov This applies in the following situations. Http freefile irs gov You buy your home within 90 days before or after the date you take out the mortgage. Http freefile irs gov The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). Http freefile irs gov (See Example 1 later. Http freefile irs gov ) You build or improve your home and take out the mortgage before the work is completed. Http freefile irs gov The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Http freefile irs gov You build or improve your home and take out the mortgage within 90 days after the work is completed. Http freefile irs gov The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. Http freefile irs gov (See Example 2 later. Http freefile irs gov ) Example 1. Http freefile irs gov You bought your main home on June 3 for $175,000. Http freefile irs gov You paid for the home with cash you got from the sale of your old home. Http freefile irs gov On July 15, you took out a mortgage of $150,000 secured by your main home. Http freefile irs gov You used the $150,000 to invest in stocks. Http freefile irs gov You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. Http freefile irs gov The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Http freefile irs gov Example 2. Http freefile irs gov On January 31, John began building a home on the lot that he owned. Http freefile irs gov He used $45,000 of his personal funds to build the home. Http freefile irs gov The home was completed on October 31. Http freefile irs gov On November 21, John took out a $36,000 mortgage that was secured by the home. Http freefile irs gov The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Http freefile irs gov The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. Http freefile irs gov This is illustrated by Figure C. Http freefile irs gov   Please click here for the text description of the image. Http freefile irs gov Figure C. Http freefile irs gov John's example Date of the mortgage. Http freefile irs gov   The date you take out your mortgage is the day the loan proceeds are disbursed. Http freefile irs gov This is generally the closing date. Http freefile irs gov You can treat the day you apply in writing for your mortgage as the date you take it out. Http freefile irs gov However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Http freefile irs gov If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Http freefile irs gov Cost of home or improvements. Http freefile irs gov   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Http freefile irs gov   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. Http freefile irs gov Substantial improvement. Http freefile irs gov   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. Http freefile irs gov    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Http freefile irs gov However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. Http freefile irs gov Acquiring an interest in a home because of a divorce. Http freefile irs gov   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. Http freefile irs gov Part of home not a qualified home. Http freefile irs gov    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. Http freefile irs gov See Divided use of your home under Qualified Home in Part I. Http freefile irs gov Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Http freefile irs gov In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Http freefile irs gov Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. Http freefile irs gov Example. Http freefile irs gov You bought your home for cash 10 years ago. Http freefile irs gov You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. Http freefile irs gov This loan is home equity debt. Http freefile irs gov Home equity debt limit. Http freefile irs gov   There is a limit on the amount of debt that can be treated as home equity debt. Http freefile irs gov The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Http freefile irs gov Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Http freefile irs gov Example. Http freefile irs gov You own one home that you bought in 2000. Http freefile irs gov Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Http freefile irs gov Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Http freefile irs gov To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Http freefile irs gov Your home equity debt is limited to $15,000. Http freefile irs gov This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. Http freefile irs gov Debt higher than limit. Http freefile irs gov   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. Http freefile irs gov But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Http freefile irs gov If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Http freefile irs gov Part of home not a qualified home. Http freefile irs gov   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. Http freefile irs gov See Divided use of your home under Qualified Home in Part I. Http freefile irs gov Fair market value (FMV). Http freefile irs gov    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Http freefile irs gov Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. Http freefile irs gov Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. Http freefile irs gov To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Http freefile irs gov How you used the proceeds does not matter. Http freefile irs gov Grandfathered debt is not limited. Http freefile irs gov All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Http freefile irs gov However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. Http freefile irs gov Refinanced grandfathered debt. Http freefile irs gov   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. Http freefile irs gov To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). Http freefile irs gov The debt must be secured by the qualified home. Http freefile irs gov   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. Http freefile irs gov After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Http freefile irs gov Exception. Http freefile irs gov   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. Http freefile irs gov This term cannot be more than 30 years. Http freefile irs gov Example. Http freefile irs gov Chester took out a $200,000 first mortgage on his home in 1986. Http freefile irs gov The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Http freefile irs gov Chester refinanced the debt in 1991 with a new 20-year mortgage. Http freefile irs gov The refinanced debt is treated as grandfathered debt for its entire term (20 years). Http freefile irs gov Line-of-credit mortgage. Http freefile irs gov    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. Http freefile irs gov The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Http freefile irs gov The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Http freefile irs gov See Average Mortgage Balance in the Table 1 Instructions that follow. Http freefile irs gov Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. Http freefile irs gov All the mortgages are grandfathered debt. Http freefile irs gov The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Http freefile irs gov In either of those cases, you do not need Table 1. Http freefile irs gov Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Http freefile irs gov Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Http freefile irs gov Table 1. Http freefile irs gov Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Http freefile irs gov Part I Qualified Loan Limit 1. Http freefile irs gov Enter the average balance of all your grandfathered debt. Http freefile irs gov See line 1 instructions 1. Http freefile irs gov   2. Http freefile irs gov Enter the average balance of all your home acquisition debt. Http freefile irs gov See line 2 instructions 2. Http freefile irs gov   3. Http freefile irs gov Enter $1,000,000 ($500,000 if married filing separately) 3. Http freefile irs gov   4. Http freefile irs gov Enter the larger of the amount on line 1 or the amount on line 3 4. Http freefile irs gov   5. Http freefile irs gov Add the amounts on lines 1 and 2. Http freefile irs gov Enter the total here 5. Http freefile irs gov   6. Http freefile irs gov Enter the smaller of the amount on line 4 or the amount on line 5 6. Http freefile irs gov   7. Http freefile irs gov If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Http freefile irs gov See the line 7 instructions for the limit which may apply to you. Http freefile irs gov 7. Http freefile irs gov   8. Http freefile irs gov Add the amounts on lines 6 and 7. Http freefile irs gov Enter the total. Http freefile irs gov This is your qualified loan limit. Http freefile irs gov 8. Http freefile irs gov   Part II Deductible Home Mortgage Interest 9. Http freefile irs gov Enter the total of the average balances of all mortgages on all qualified homes. Http freefile irs gov  See line 9 instructions 9. Http freefile irs gov     If line 8 is less than line 9, go on to line 10. Http freefile irs gov If line 8 is equal to or more than line 9, stop here. Http freefile irs gov All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Http freefile irs gov     10. Http freefile irs gov Enter the total amount of interest that you paid. Http freefile irs gov See line 10 instructions 10. Http freefile irs gov   11. Http freefile irs gov Divide the amount on line 8 by the amount on line 9. Http freefile irs gov Enter the result as a decimal amount (rounded to three places) 11. Http freefile irs gov × . Http freefile irs gov 12. Http freefile irs gov Multiply the amount on line 10 by the decimal amount on line 11. Http freefile irs gov Enter the result. Http freefile irs gov This is your deductible home mortgage interest. Http freefile irs gov Enter this amount on Schedule A (Form 1040) 12. Http freefile irs gov   13. Http freefile irs gov Subtract the amount on line 12 from the amount on line 10. Http freefile irs gov Enter the result. Http freefile irs gov This is not home mortgage interest. Http freefile irs gov See line 13 instructions 13. Http freefile irs gov   Home equity debt only. Http freefile irs gov   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Http freefile irs gov Enter zero on line 6 and complete the rest of Table 1. Http freefile irs gov Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Http freefile irs gov You need these amounts to complete lines 1, 2, and 9 of Table 1. Http freefile irs gov You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Http freefile irs gov The following are methods you can use to figure your average mortgage balances. Http freefile irs gov However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Http freefile irs gov Average of first and last balance method. Http freefile irs gov   You can use this method if all the following apply. Http freefile irs gov You did not borrow any new amounts on the mortgage during the year. Http freefile irs gov (This does not include borrowing the original mortgage amount. Http freefile irs gov ) You did not prepay more than one month's principal during the year. Http freefile irs gov (This includes prepayment by refinancing your home or by applying proceeds from its sale. Http freefile irs gov ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Http freefile irs gov You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Http freefile irs gov    To figure your average balance, complete the following worksheet. Http freefile irs gov    1. Http freefile irs gov Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. Http freefile irs gov Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. Http freefile irs gov Add amounts on lines 1 and 2   4. Http freefile irs gov Divide the amount on line 3 by 2. Http freefile irs gov Enter the result   Interest paid divided by interest rate method. Http freefile irs gov   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. Http freefile irs gov    Complete the following worksheet to figure your average balance. Http freefile irs gov    1. Http freefile irs gov Enter the interest paid in 2013. Http freefile irs gov Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Http freefile irs gov However, do include interest that is for 2013 but was paid in an earlier year   2. Http freefile irs gov Enter the annual interest rate on the mortgage. Http freefile irs gov If the interest rate varied in 2013, use the lowest rate for the year   3. Http freefile irs gov Divide the amount on line 1 by the amount on line 2. Http freefile irs gov Enter the result   Example. Http freefile irs gov Mr. Http freefile irs gov Blue had a line of credit secured by his main home all year. Http freefile irs gov He paid interest of $2,500 on this loan. Http freefile irs gov The interest rate on the loan was 9% (. Http freefile irs gov 09) all year. Http freefile irs gov His average balance using this method is $27,778, figured as follows. Http freefile irs gov 1. Http freefile irs gov Enter the interest paid in 2013. Http freefile irs gov Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Http freefile irs gov However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Http freefile irs gov Enter the annual interest rate on the mortgage. Http freefile irs gov If the interest rate varied in 2013, use the lowest rate for the year . Http freefile irs gov 09 3. Http freefile irs gov Divide the amount on line 1 by the amount on line 2. Http freefile irs gov Enter the result $27,778 Statements provided by your lender. Http freefile irs gov   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. Http freefile irs gov You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Http freefile irs gov   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. Http freefile irs gov   If your lender can give you your average balance for the year, you can use that amount. Http freefile irs gov Example. Http freefile irs gov Ms. Http freefile irs gov Brown had a home equity loan secured by her main home all year. Http freefile irs gov She received monthly statements showing her average balance for each month. Http freefile irs gov She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Http freefile irs gov Mixed-use mortgages. Http freefile irs gov   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). Http freefile irs gov For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). Http freefile irs gov   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. Http freefile irs gov Do not use the methods described earlier in this section to figure the average balance of either category. Http freefile irs gov Instead, for each category, use the following method. Http freefile irs gov Figure the balance of that category of debt for each month. Http freefile irs gov This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Http freefile irs gov Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. Http freefile irs gov Add together the monthly balances figured in (1). Http freefile irs gov Divide the result in (2) by 12. Http freefile irs gov   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. Http freefile irs gov Example 1. Http freefile irs gov In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Http freefile irs gov On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. Http freefile irs gov She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Http freefile irs gov Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Http freefile irs gov During 2013, her principal payments on the second mortgage totaled $10,000. Http freefile irs gov To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. Http freefile irs gov The January and February balances were zero. Http freefile irs gov The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Http freefile irs gov (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Http freefile irs gov ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Http freefile irs gov Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Http freefile irs gov Example 2. Http freefile irs gov The facts are the same as in Example 1. Http freefile irs gov In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Http freefile irs gov The balance of the home acquisition debt remains $180,000 for each of those months. Http freefile irs gov Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). Http freefile irs gov The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Http freefile irs gov Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Http freefile irs gov L
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Understanding Your CP261 Notice

CP261 is the approval notice for Form 2553, Election by a Small Business Corporation.


What you need to do

  • Keep this S corporation approval letter (CP261 Notice), in your permanent records.
  • Timely file Form 1120S reporting income/loss for the S corporation including Schedules K-1 for all shareholders.
  • Timely file all employment tax returns.

You may want to

  • If your address changes, submit Form 8822-B, Change of Address – Business, to ensure our records remain correct.

Answers to Common Questions

Page Last Reviewed or Updated: 14-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

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