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Irs Form 1040x

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Irs Form 1040x

Irs form 1040x 2. Irs form 1040x   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Irs form 1040x Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Irs form 1040x Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Irs form 1040x Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Irs form 1040x The annual accounting period for your income tax return is called a tax year. Irs form 1040x You can use one of the following tax years. Irs form 1040x A calendar tax year. Irs form 1040x A fiscal tax year. Irs form 1040x Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Irs form 1040x A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Irs form 1040x Calendar tax year. Irs form 1040x   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Irs form 1040x   You must adopt the calendar tax year if any of the following apply. Irs form 1040x You do not keep books. Irs form 1040x You have no annual accounting period. Irs form 1040x Your present tax year does not qualify as a fiscal year. Irs form 1040x Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Irs form 1040x   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Irs form 1040x For more information, see Change in tax year, later. Irs form 1040x   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Irs form 1040x Fiscal tax year. Irs form 1040x   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Irs form 1040x A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Irs form 1040x   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Irs form 1040x   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Irs form 1040x Change in tax year. Irs form 1040x   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Irs form 1040x See the Instructions for Form 1128 for exceptions. Irs form 1040x If you qualify for an automatic approval request, a user fee is not required. Irs form 1040x If you do not qualify for automatic approval, a ruling must be requested. Irs form 1040x See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Irs form 1040x Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Irs form 1040x Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Irs form 1040x You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Irs form 1040x After that, if you want to change your accounting method, you must generally get IRS approval. Irs form 1040x See Change in Accounting Method, later. Irs form 1040x Kinds of methods. Irs form 1040x   Generally, you can use any of the following accounting methods. Irs form 1040x Cash method. Irs form 1040x An accrual method. Irs form 1040x Special methods of accounting for certain items of income and expenses. Irs form 1040x Combination method using elements of two or more of the above. Irs form 1040x You must use the same accounting method to figure your taxable income and to keep your books. Irs form 1040x Also, you must use an accounting method that clearly shows your income. Irs form 1040x Business and personal items. Irs form 1040x   You can account for business and personal items under different accounting methods. Irs form 1040x For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Irs form 1040x Two or more businesses. Irs form 1040x   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Irs form 1040x They are separate and distinct only if you maintain complete and separate books and records for each business. Irs form 1040x Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Irs form 1040x However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Irs form 1040x For more information, see Inventories, later. Irs form 1040x Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Irs form 1040x If you receive property or services, you must include their fair market value in income. Irs form 1040x Example. Irs form 1040x On December 30, 2012, Mrs. Irs form 1040x Sycamore sent you a check for interior decorating services you provided to her. Irs form 1040x You received the check on January 2, 2013. Irs form 1040x You must include the amount of the check in income for 2013. Irs form 1040x Constructive receipt. Irs form 1040x   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Irs form 1040x You do not need to have possession of it. Irs form 1040x If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Irs form 1040x Example. Irs form 1040x Interest is credited to your bank account in December 2013. Irs form 1040x You do not withdraw it or enter it into your passbook until 2014. Irs form 1040x You must include it in your gross income for 2013. Irs form 1040x Delaying receipt of income. Irs form 1040x   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Irs form 1040x You must report the income in the year the property is received or made available to you without restriction. Irs form 1040x Example. Irs form 1040x Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Irs form 1040x She was told in December that her payment was available. Irs form 1040x At her request, she was not paid until January 2014. Irs form 1040x She must include this payment in her 2013 income because it was constructively received in 2013. Irs form 1040x Checks. Irs form 1040x   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Irs form 1040x Example. Irs form 1040x Dr. Irs form 1040x Redd received a check for $500 on December 31, 2013, from a patient. Irs form 1040x She could not deposit the check in her business account until January 2, 2014. Irs form 1040x She must include this fee in her income for 2013. Irs form 1040x Debts paid by another person or canceled. Irs form 1040x   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Irs form 1040x If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Irs form 1040x For more information, see Canceled Debt under Kinds of Income in chapter 5. Irs form 1040x Repayment of income. Irs form 1040x   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Irs form 1040x If the amount you repay is over $3,000, a special rule applies. Irs form 1040x For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Irs form 1040x Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Irs form 1040x This includes business expenses for which you contest liability. Irs form 1040x However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Irs form 1040x Expenses paid in advance. Irs form 1040x   You can deduct an expense you pay in advance only in the year to which it applies. Irs form 1040x Example. Irs form 1040x You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Irs form 1040x You can deduct $500 in 2013 and $500 in 2014. Irs form 1040x Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Irs form 1040x The purpose of an accrual method of accounting is to match income and expenses in the correct year. Irs form 1040x Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Irs form 1040x Example. Irs form 1040x You are a calendar year accrual method taxpayer. Irs form 1040x You sold a computer on December 28, 2013. Irs form 1040x You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Irs form 1040x You must include the amount received for the computer in your 2013 income. Irs form 1040x Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Irs form 1040x Estimated income. Irs form 1040x   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Irs form 1040x Change in payment schedule for services. Irs form 1040x   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Irs form 1040x Advance payments for services. Irs form 1040x   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Irs form 1040x However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Irs form 1040x However, you cannot postpone including any payment beyond that tax year. Irs form 1040x   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Irs form 1040x That publication also explains special rules for reporting the following types of income. Irs form 1040x Advance payments for service agreements. Irs form 1040x Prepaid rent. Irs form 1040x Advance payments for sales. Irs form 1040x   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Irs form 1040x If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Irs form 1040x An agreement includes a gift certificate that can be redeemed for goods. Irs form 1040x Treat amounts that are due and payable as amounts you received. Irs form 1040x   You generally include an advance payment in income for the tax year in which you receive it. Irs form 1040x However, you can use an alternative method. Irs form 1040x For information about the alternative method, see Publication 538. Irs form 1040x Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Irs form 1040x The all-events test has been met. Irs form 1040x The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Irs form 1040x Economic performance has occurred. Irs form 1040x Economic performance. Irs form 1040x   You generally cannot deduct or capitalize a business expense until economic performance occurs. Irs form 1040x If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Irs form 1040x If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Irs form 1040x An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Irs form 1040x For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Irs form 1040x Example. Irs form 1040x You are a calendar year taxpayer and use an accrual method of accounting. Irs form 1040x You buy office supplies in December 2013. Irs form 1040x You receive the supplies and the bill in December, but you pay the bill in January 2014. Irs form 1040x You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Irs form 1040x Your office supplies may qualify as a recurring expense. Irs form 1040x In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Irs form 1040x Keeping inventories. Irs form 1040x   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Irs form 1040x If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Irs form 1040x For more information, see Inventories , later. Irs form 1040x Special rule for related persons. Irs form 1040x   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Irs form 1040x Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Irs form 1040x If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Irs form 1040x   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Irs form 1040x For a list of other related persons, see section 267 of the Internal Revenue Code. Irs form 1040x Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Irs form 1040x However, the following restrictions apply. Irs form 1040x If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Irs form 1040x (See, however, Inventories, later. Irs form 1040x ) You can use the cash method for all other items of income and expenses. Irs form 1040x If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Irs form 1040x If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Irs form 1040x If you use a combination method that includes the cash method, treat that combination method as the cash method. Irs form 1040x Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Irs form 1040x However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Irs form 1040x These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Irs form 1040x A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Irs form 1040x A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Irs form 1040x Qualifying taxpayer. Irs form 1040x   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Irs form 1040x (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Irs form 1040x ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Irs form 1040x Qualifying small business taxpayer. Irs form 1040x   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Irs form 1040x (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Irs form 1040x ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Irs form 1040x Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Irs form 1040x Business not owned or not in existence for 3 years. Irs form 1040x   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Irs form 1040x If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Irs form 1040x Materials and supplies that are not incidental. Irs form 1040x   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Irs form 1040x If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Irs form 1040x Changing accounting method. Irs form 1040x   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Irs form 1040x See Change in Accounting Method, later. Irs form 1040x More information. Irs form 1040x    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Irs form 1040x For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Irs form 1040x Items included in inventory. Irs form 1040x   If you are required to account for inventories, include the following items when accounting for your inventory. Irs form 1040x Merchandise or stock in trade. Irs form 1040x Raw materials. Irs form 1040x Work in process. Irs form 1040x Finished products. Irs form 1040x Supplies that physically become a part of the item intended for sale. Irs form 1040x Valuing inventory. Irs form 1040x   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Irs form 1040x To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Irs form 1040x   Inventory valuation rules cannot be the same for all kinds of businesses. Irs form 1040x The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Irs form 1040x Your inventory practices must be consistent from year to year. Irs form 1040x More information. Irs form 1040x   For more information about inventories, see Publication 538. Irs form 1040x Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Irs form 1040x Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Irs form 1040x You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Irs form 1040x Activities subject to the uniform capitalization rules. Irs form 1040x   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Irs form 1040x Produce real or tangible personal property. Irs form 1040x For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Irs form 1040x Acquire property for resale. Irs form 1040x Exceptions. Irs form 1040x   These rules do not apply to the following property. Irs form 1040x Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Irs form 1040x Property you produce if you meet either of the following conditions. Irs form 1040x Your indirect costs of producing the property are $200,000 or less. Irs form 1040x You use the cash method of accounting and do not account for inventories. Irs form 1040x For more information, see Inventories, earlier. Irs form 1040x Special Methods There are special methods of accounting for certain items of income or expense. Irs form 1040x These include the following. Irs form 1040x Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Irs form 1040x Bad debts, discussed in chapter 10 of Publication 535. Irs form 1040x Depletion, discussed in chapter 9 of Publication 535. Irs form 1040x Depreciation, discussed in Publication 946, How To Depreciate Property. Irs form 1040x Installment sales, discussed in Publication 537, Installment Sales. Irs form 1040x Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Irs form 1040x A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Irs form 1040x To get approval, you must file Form 3115, Application for Change in Accounting Method. Irs form 1040x You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Irs form 1040x You may have to pay a user fee. Irs form 1040x For more information, see the form instructions. Irs form 1040x Automatic change procedures. Irs form 1040x   Certain taxpayers can presume to have IRS approval to change their method of accounting. Irs form 1040x The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Irs form 1040x No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Irs form 1040x   Generally, you must use Form 3115 to request an automatic change. Irs form 1040x For more information, see the Instructions for Form 3115. Irs form 1040x Prev  Up  Next   Home   More Online Publications
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The Irs Form 1040x

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