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Tax Return 2013

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Tax Return 2013

Tax return 2013 1. Tax return 2013   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Tax return 2013 Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Tax return 2013 The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Tax return 2013 If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Tax return 2013 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Tax return 2013 Rental income is any payment you receive for the use or occupation of property. Tax return 2013 In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Tax return 2013 When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Tax return 2013 Most individual taxpayers use the cash method. Tax return 2013 Cash method. Tax return 2013   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Tax return 2013 You constructively receive income when it is made available to you, for example, by being credited to your bank account. Tax return 2013 Accrual method. Tax return 2013    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Tax return 2013 You generally deduct your expenses when you incur them, rather than when you pay them. Tax return 2013 More information. Tax return 2013   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Tax return 2013 Types of Income The following are common types of rental income. Tax return 2013 Advance rent. Tax return 2013   Advance rent is any amount you receive before the period that it covers. Tax return 2013 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Tax return 2013 Example. Tax return 2013 On March 18, 2013, you signed a 10-year lease to rent your property. Tax return 2013 During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Tax return 2013 You must include $19,200 in your rental income in the first year. Tax return 2013 Canceling a lease. Tax return 2013   If your tenant pays you to cancel a lease, the amount you receive is rent. Tax return 2013 Include the payment in your income in the year you receive it regardless of your method of accounting. Tax return 2013 Expenses paid by tenant. Tax return 2013   If your tenant pays any of your expenses, those payments are rental income. Tax return 2013 Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Tax return 2013 For more information, see Rental Expenses , later. Tax return 2013 Example 1. Tax return 2013 Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Tax return 2013 Under the terms of the lease, your tenant does not have to pay this bill. Tax return 2013 Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Tax return 2013 You can deduct the utility payment made by your tenant as a rental expense. Tax return 2013 Example 2. Tax return 2013 While you are out of town, the furnace in your rental property stops working. Tax return 2013 Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Tax return 2013 Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Tax return 2013 You can deduct the repair payment made by your tenant as a rental expense. Tax return 2013 Property or services. Tax return 2013   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Tax return 2013   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Tax return 2013 Example. Tax return 2013 Your tenant is a house painter. Tax return 2013 He offers to paint your rental property instead of paying 2 months rent. Tax return 2013 You accept his offer. Tax return 2013 Include in your rental income the amount the tenant would have paid for 2 months rent. Tax return 2013 You can deduct that same amount as a rental expense for painting your property. Tax return 2013 Security deposits. Tax return 2013   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Tax return 2013 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Tax return 2013    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Tax return 2013 Include it in your income when you receive it. Tax return 2013 Other Sources of Rental Income Lease with option to buy. Tax return 2013   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Tax return 2013 If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Tax return 2013 Part interest. Tax return 2013   If you own a part interest in rental property, you must report your part of the rental income from the property. Tax return 2013 Rental of property also used as your home. Tax return 2013   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Tax return 2013 However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Tax return 2013 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Tax return 2013 Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Tax return 2013 Personal use of rental property. Tax return 2013   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Tax return 2013 Also, your rental expense deductions may be limited. Tax return 2013 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Tax return 2013 Part interest. Tax return 2013   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Tax return 2013 Example. Tax return 2013 Roger owns a one-half undivided interest in a rental house. Tax return 2013 Last year he paid $968 for necessary repairs on the property. Tax return 2013 Roger can deduct $484 (50% × $968) as a rental expense. Tax return 2013 He is entitled to reimbursement for the remaining half from the co-owner. Tax return 2013 When To Deduct You generally deduct your rental expenses in the year you pay them. Tax return 2013 If you use the accrual method, see Publication 538 for more information. Tax return 2013 Types of Expenses Listed below are the most common rental expenses. Tax return 2013 Advertising. Tax return 2013 Auto and travel expenses. Tax return 2013 Cleaning and maintenance. Tax return 2013 Commissions. Tax return 2013 Depreciation. Tax return 2013 Insurance. Tax return 2013 Interest (other). Tax return 2013 Legal and other professional fees. Tax return 2013 Local transportation expenses. Tax return 2013 Management fees. Tax return 2013 Mortgage interest paid to banks, etc. Tax return 2013 Points. Tax return 2013 Rental payments. Tax return 2013 Repairs. Tax return 2013 Taxes. Tax return 2013 Utilities. Tax return 2013 Some of these expenses, as well as other less common ones, are discussed below. Tax return 2013 Depreciation. Tax return 2013   Depreciation is a capital expense. Tax return 2013 It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Tax return 2013   You can begin to depreciate rental property when it is ready and available for rent. Tax return 2013 See Placed in Service under When Does Depreciation Begin and End in chapter 2. Tax return 2013 Insurance premiums paid in advance. Tax return 2013   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Tax return 2013 You cannot deduct the total premium in the year you pay it. Tax return 2013 See chapter 6 of Publication 535 for information on deductible premiums. Tax return 2013 Interest expense. Tax return 2013   You can deduct mortgage interest you pay on your rental property. Tax return 2013 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Tax return 2013 Chapter 4 of Publication 535 explains mortgage interest in detail. Tax return 2013 Expenses paid to obtain a mortgage. Tax return 2013   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Tax return 2013 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Tax return 2013 Form 1098, Mortgage Interest Statement. Tax return 2013   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Tax return 2013 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, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Tax return 2013 Attach a statement to your return showing the name and address of the other person. Tax return 2013 On the dotted line next to line 13, enter “See attached. Tax return 2013 ” Legal and other professional fees. Tax return 2013   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Tax return 2013 For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Tax return 2013 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Tax return 2013 Local benefit taxes. Tax return 2013   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Tax return 2013 These charges are nondepreciable capital expenditures and must be added to the basis of your property. Tax return 2013 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Tax return 2013 Local transportation expenses. Tax return 2013   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Tax return 2013 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Tax return 2013 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Tax return 2013   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Tax return 2013 For 2013, the standard mileage rate for business use is 56. Tax return 2013 5 cents per mile. Tax return 2013 For more information, see chapter 4 of Publication 463. Tax return 2013    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Tax return 2013 In addition, you must complete Form 4562, Part V, and attach it to your tax return. Tax return 2013 Pre-rental expenses. Tax return 2013   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Tax return 2013 Rental of equipment. Tax return 2013   You can deduct the rent you pay for equipment that you use for rental purposes. Tax return 2013 However, in some cases, lease contracts are actually purchase contracts. Tax return 2013 If so, you cannot deduct these payments. Tax return 2013 You can recover the cost of purchased equipment through depreciation. Tax return 2013 Rental of property. Tax return 2013   You can deduct the rent you pay for property that you use for rental purposes. Tax return 2013 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Tax return 2013 Travel expenses. Tax return 2013   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Tax return 2013 You must properly allocate your expenses between rental and nonrental activities. Tax return 2013 You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Tax return 2013 The cost of improvements is recovered by taking depreciation. Tax return 2013 For information on travel expenses, see chapter 1 of Publication 463. Tax return 2013    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Tax return 2013 Uncollected rent. Tax return 2013   If you are a cash basis taxpayer, do not deduct uncollected rent. Tax return 2013 Because you have not included it in your income, it is not deductible. Tax return 2013   If you use an accrual method, report income when you earn it. Tax return 2013 If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Tax return 2013 See chapter 10 of Publication 535 for more information about business bad debts. Tax return 2013 Vacant rental property. Tax return 2013   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Tax return 2013 However, you cannot deduct any loss of rental income for the period the property is vacant. Tax return 2013 Vacant while listed for sale. Tax return 2013   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Tax return 2013 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Tax return 2013 Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Tax return 2013 These charges are also called loan origination fees, maximum loan charges, or premium charges. Tax return 2013 Any of these charges (points) that are solely for the use of money are interest. Tax return 2013 Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Tax return 2013 The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Tax return 2013 In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Tax return 2013 The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Tax return 2013 If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Tax return 2013 De minimis OID. Tax return 2013   The OID is de minimis if it is less than one-fourth of 1% (. Tax return 2013 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Tax return 2013   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Tax return 2013 On a constant-yield basis over the term of the loan. Tax return 2013 On a straight line basis over the term of the loan. Tax return 2013 In proportion to stated interest payments. Tax return 2013 In its entirety at maturity of the loan. Tax return 2013 You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Tax return 2013 Example. Tax return 2013 Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Tax return 2013 The loan is to be repaid over 30 years. Tax return 2013 During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Tax return 2013 When the loan was made, she paid $1,500 in points to the lender. Tax return 2013 The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Tax return 2013 Carol determines that the points (OID) she paid are de minimis based on the following computation. Tax return 2013 Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Tax return 2013 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Tax return 2013 Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Tax return 2013 Under the straight line method, she can deduct $50 each year for 30 years. Tax return 2013 Constant-yield method. Tax return 2013   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Tax return 2013   You figure your deduction for the first year in the following manner. Tax return 2013 Determine the issue price of the loan. Tax return 2013 If you paid points on the loan, the issue price generally is the difference between the principal and the points. Tax return 2013 Multiply the result in (1) by the yield to maturity (defined later). Tax return 2013 Subtract any qualified stated interest payments (defined later) from the result in (2). Tax return 2013 This is the OID you can deduct in the first year. Tax return 2013 Yield to maturity (YTM). Tax return 2013   This rate is generally shown in the literature you receive from your lender. Tax return 2013 If you do not have this information, consult your lender or tax advisor. Tax return 2013 In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Tax return 2013 Qualified stated interest (QSI). Tax return 2013   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Tax return 2013 Example—Year 1. Tax return 2013 The facts are the same as in the previous example. Tax return 2013 The yield to maturity on Carol's loan is 10. Tax return 2013 2467%, compounded annually. Tax return 2013 She figured the amount of points (OID) she could deduct in 2013 as follows. Tax return 2013 Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Tax return 2013 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Tax return 2013 To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Tax return 2013 Then follow steps (2) and (3), earlier. Tax return 2013 Example—Year 2. Tax return 2013 Carol figured the deduction for 2014 as follows. Tax return 2013 Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Tax return 2013 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Tax return 2013    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Tax return 2013 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Tax return 2013 However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Tax return 2013 Points when loan refinance is more than the previous outstanding balance. Tax return 2013   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Tax return 2013 For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Tax return 2013 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Tax return 2013 Improvements. Tax return 2013   You must capitalize any expense you pay to improve your rental property. Tax return 2013 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Tax return 2013 Betterments. Tax return 2013   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Tax return 2013 Restoration. Tax return 2013   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Tax return 2013 Adaptation. Tax return 2013   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Tax return 2013 Separate the costs of repairs and improvements, and keep accurate records. Tax return 2013 You will need to know the cost of improvements when you sell or depreciate your property. Tax return 2013 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Tax return 2013 Table 1-1. Tax return 2013 Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
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The Tax Return 2013

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