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1040a Form

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1040a Form

1040a form 6. 1040a form   Retail Tax on Heavy Trucks, Trailers, and Tractors Table of Contents Highway vehicle. 1040a form Vehicles not considered highway vehicles. 1040a form Idling reduction device. 1040a form Separate purchase. 1040a form Leases. 1040a form Exported vehicle. 1040a form Tax on resale of tax-paid trailers and semitrailers. 1040a form Use treated as sale. 1040a form Sale. 1040a form Long-term lease. 1040a form Short-term lease. 1040a form Related person. 1040a form Exclusions from tax base. 1040a form Sales not at arm's length. 1040a form Installment sales. 1040a form Repairs and modifications. 1040a form Further manufacture. 1040a form Rail trailers and rail vans. 1040a form Parts and accessories. 1040a form Trash containers. 1040a form House trailers. 1040a form Camper coaches or bodies for self-propelled mobile homes. 1040a form Farm feed, seed, and fertilizer equipment. 1040a form Ambulances and hearses. 1040a form Truck-tractors. 1040a form Concrete mixers. 1040a form Registration requirement. 1040a form Further manufacture. 1040a form A tax of 12% of the sales price is imposed on the first retail sale of the following articles, including related parts and accessories sold on or in connection with, or with the sale of, the articles. 1040a form Truck chassis and bodies. 1040a form Truck trailer and semitrailer chassis and bodies. 1040a form Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. 1040a form A truck is a highway vehicle primarily designed to transport its load on the same chassis as the engine, even if it is equipped to tow a vehicle, such as a trailer or semitrailer. 1040a form A tractor is a highway vehicle designed to tow a vehicle, such as a trailer or semitrailer. 1040a form A tractor may carry incidental items of cargo when towing or limited amounts of cargo when not towing. 1040a form A sale of a truck, truck trailer, or semitrailer is considered a sale of a chassis and a body. 1040a form The seller is liable for the tax. 1040a form Chassis or body. 1040a form   A chassis or body is taxable only if you sell it for use as a component part of a highway vehicle that is a truck, truck trailer or semitrailer, or a tractor of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. 1040a form Highway vehicle. 1040a form   A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. 1040a form Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. 1040a form A vehicle is a highway vehicle even though the vehicle's design allows it to perform a highway transportation function for only one of the following. 1040a form A particular type of load, such as passengers, furnishings, and personal effects (as in a house, office, or utility trailer). 1040a form A special kind of cargo, goods, supplies, or materials. 1040a form Some off-highway task unrelated to highway transportation, except as discussed next. 1040a form Vehicles not considered highway vehicles. 1040a form   Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the retail tax. 1040a form Specially designed mobile machinery for nontransportation functions. 1040a form A self-propelled vehicle is not a highway vehicle if all the following apply. 1040a form The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways. 1040a form The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if applicable) for the machinery or equipment, whether or not the machinery or equipment is in operation. 1040a form The chassis could not, because of its special design and without substantial structural modification, be used as part of a vehicle designed to carry any other load. 1040a form Vehicles specially designed for off-highway transportation. 1040a form A vehicle is not treated as a highway vehicle if the vehicle is specially designed for the primary function of transporting a particular type of load other than over the public highway and because of this special design, the vehicles's capability to transport a load over a public highway is substantially limited or impaired. 1040a form To make this determination, you can take into account the vehicle's size, whether the vehicle is subject to licensing, safety, or other requirements, and whether the vehicle can transport a load at a sustained speed of at least 25 miles per hour. 1040a form It does not matter that the vehicle can carry heavier loads off highway than it is allowed to carry over the highway. 1040a form Nontransportation trailers and semitrailers. 1040a form A trailer or semitrailer is not treated as a highway vehicle if it is specially designed to function only as an enclosed stationary shelter for carrying on a nontransportation function at an off-highway site. 1040a form For example, a trailer that is capable only of functioning as an office for an off-highway construction operation is not a highway vehicle. 1040a form Gross vehicle weight. 1040a form   The tax does not apply to truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight (defined below) of 33,000 pounds or less. 1040a form It also does not apply to truck trailer and semitrailer chassis and bodies suitable for use with a trailer or semitrailer that has a gross vehicle weight of 26,000 pounds or less. 1040a form Tractors that have a gross vehicle weight of 19,500 pounds or less and a gross combined weight of 33,000 pounds or less are excluded from the 12% retail tax. 1040a form   The following four classifications of truck body types meet the suitable for use standard and will be excluded from the retail excise tax. 1040a form Platform truck bodies 21 feet or less in length. 1040a form Dry freight and refrigerated truck van bodies 24 feet or less in length. 1040a form Dump truck bodies with load capacities of 8 cubic yards or less. 1040a form Refuse packer truck bodies with load capacities of 20 cubic yards or less. 1040a form For more information on these classifications, see Revenue Procedure 2005-19, which is on page 832 of I. 1040a form R. 1040a form B. 1040a form 2005-14 at www. 1040a form irs. 1040a form gov/pub/irs-irbs/irb05-14. 1040a form pdf. 1040a form   The gross vehicle weight means the maximum total weight of a loaded vehicle. 1040a form Generally, this maximum total weight is the gross vehicle weight rating provided by the manufacturer or determined by the seller of the completed article. 1040a form The seller's gross vehicle weight rating is determined solely on the basis of the strength of the chassis frame and the axle capacity and placement. 1040a form The seller may not take into account any readily attachable components (such as tires or rim assemblies) in determining the gross vehicle weight. 1040a form See Regulations section 145. 1040a form 4051-1(e)(3) for more information. 1040a form Parts or accessories. 1040a form   The tax applies to parts or accessories sold on or in connection with, or with the sale of, a taxable article. 1040a form For example, if at the time of the sale by the retailer, the part or accessory has been ordered from the retailer, the part or accessory will be considered as sold in connection with the sale of the vehicle. 1040a form The tax applies in this case whether or not the retailer bills the parts or accessories separately. 1040a form   If the retailer sells a taxable chassis, body, or tractor without parts or accessories considered essential for the operation or appearance of the taxable article, the sale of the parts or accessories by the retailer to the purchaser is considered made in connection with the sale of the taxable article even though they are shipped separately, at the same time, or on a different date. 1040a form The tax applies unless there is evidence to the contrary. 1040a form For example, if a retailer sells to any person a chassis and the bumpers for the chassis, or sells a taxable tractor and the fifth wheel and attachments, the tax applies to the parts or accessories regardless of the method of billing or the time at which the shipments were made. 1040a form The tax does not apply to parts and accessories that are spares or replacements. 1040a form   The tax imposed on parts and accessories sold on or in connection with the taxable articles listed earlier and the tax imposed on the separate purchase of parts and accessories (discussed next) for the taxable articles listed earlier do not apply to an idling reduction device or insulation that has an R value of at least R35 per inch. 1040a form Idling reduction device. 1040a form   An idling reduction device is any device or system of devices that provide the tractor with services, such as heat, air conditioning, and electricity, without the use of the main drive engine while the tractor is temporarily parked or stationary. 1040a form The device must be affixed to the tractor and determined by the Administrator of the EPA, in consultation with the Secretary of Energy and Secretary of Transportation, to reduce idling while parked or stationary. 1040a form The EPA discusses idling reduction technologies on its website at www. 1040a form epa. 1040a form gov/smartway/technology/idling. 1040a form htm. 1040a form Separate purchase. 1040a form   The tax generally applies to the price of a part or accessory and its installation if the following conditions are met. 1040a form The owner, lessee, or operator of any vehicle that contains a taxable article installs any part or accessory on the vehicle. 1040a form The installation occurs within 6 months after the vehicle is first placed in service. 1040a form   The owners of the trade or business installing the parts or accessories are secondarily liable for the tax. 1040a form   A vehicle is placed in service on the date the owner takes actual possession of the vehicle. 1040a form This date is established by a signed delivery ticket or other comparable document indicating delivery to and acceptance by the owner. 1040a form   The tax does not apply if the installed part or accessory is a replacement part or accessory. 1040a form The tax also does not apply if the total price of the parts and accessories, including installation charges, during the 6-month period is $1,000 or less. 1040a form However, if the total price is more than $1,000, the tax applies to the cost of all parts and accessories (and installation charges) during that period. 1040a form Example. 1040a form You bought a taxable vehicle and placed it in service on April 8. 1040a form On May 3, you bought and installed parts and accessories at a cost of $850. 1040a form On July 15, you bought and installed parts and accessories for $300. 1040a form Tax of $138 (12% of $1,150) applies on July 15. 1040a form Also, tax will apply to any costs of additional parts and accessories installed on the vehicle before October 8. 1040a form First retail sale defined. 1040a form   The sale of an article is treated as the first retail sale, and the seller will be liable for the tax imposed on the sale unless one of the following exceptions applies. 1040a form There has been a prior taxable sale, lease, or use of the article (however, see Tax on resale of tax-paid trailers and semitrailers, later). 1040a form The sale qualifies as a tax-free sale under section 4221 (see Sales exempt from tax, later). 1040a form The seller in good faith accepts from the purchaser a statement signed under penalties of perjury and executed in good faith that the purchaser intends to resell the article or lease it on a long-term basis. 1040a form There is no registration requirement. 1040a form Leases. 1040a form   A long-term lease (a lease with a term of 1 year or more, taking into account options to renew) before a first retail sale is treated as a taxable sale. 1040a form The tax is imposed on the lessor at the time of the lease. 1040a form   A short-term lease (a lease with a term of less than 1 year, taking into account options to renew) before a first retail sale is treated as a taxable use. 1040a form The tax is imposed on the lessor at the time of the lease. 1040a form Exported vehicle. 1040a form   A vehicle exported before its first retail sale, used in a foreign country, and then returned to the United States is subject to the retail tax on its first domestic use or retail sale after importation. 1040a form Tax on resale of tax-paid trailers and semitrailers. 1040a form   The tax applies to a trailer or semitrailer resold within 6 months after having been sold in a taxable sale. 1040a form The seller liable for the tax on the resale can claim a credit equal to the tax paid on the prior taxable sale. 1040a form The credit cannot exceed the tax on the resale. 1040a form See Regulations section 145. 1040a form 4052-1(a)(4) for information on the conditions to allowance for the credit. 1040a form Use treated as sale. 1040a form   If any person uses a taxable article before the first retail sale of the article, that person is liable for the tax as if the article had been sold at retail by that person. 1040a form Figure the tax on the price at which similar articles are sold in the ordinary course of trade by retailers. 1040a form The tax attaches when the use begins. 1040a form   If the seller of an article regularly sells the articles at retail in arm's-length transactions, figure the tax on its use on the lowest established retail price for the articles in effect at the time of the taxable use. 1040a form   If the seller of an article does not regularly sell the articles at retail in arm's-length transactions, a constructive price on which the tax is figured will be determined by the IRS after considering the selling practices and price structures of sellers of similar articles. 1040a form   If a seller of an article incurs liability for tax on the use of the article and later sells or leases the article in a transaction that otherwise would be taxable, liability for tax is not incurred on the later sale or lease. 1040a form Presumptive retail sales price. 1040a form   There are rules to ensure that the tax base of transactions considered to be taxable sales includes either an actual or presumed markup percentage. 1040a form If the person liable for tax is the vehicle's manufacturer, producer, or importer, the following discussions show how you figure the presumptive retail sales price depending on the type of transaction and the persons involved in the transaction. 1040a form Table 6-1 outlines the appropriate tax base calculation for various transactions. 1040a form   The presumed markup percentage to be used for trucks and truck-tractors is 4%. 1040a form But for truck trailers and semitrailers and remanufactured trucks and tractors, the presumed markup percentage is zero. 1040a form Sale. 1040a form   For a taxable sale by a manufacturer, producer, importer, or related person, you generally figure the tax on a tax base of the sales price plus an amount equal to the presumed markup percentage times that sales price. 1040a form Long-term lease. 1040a form   In the case of a long-term lease by a manufacturer, producer, importer, or related person, figure the tax on a tax base of the constructive sales price plus an amount equal to the presumed markup percentage times the constructive sales price. 1040a form Short-term lease. 1040a form   When a manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a constructive sales price at which those or similar articles generally are sold in the ordinary course of trade by retailers. 1040a form   But if the lessor in this situation regularly sells articles at retail in arm's-length transactions, figure the tax on the lowest established retail price in effect at the time of the taxable use. 1040a form   If a person other than the manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a tax base of the price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor and a presumed markup percentage. 1040a form Related person. 1040a form   A related person is any member of the same controlled group as the manufacturer, producer, or importer. 1040a form Do not treat as a related person a person that sells the articles through a permanent retail establishment in the normal course of being a retailer if that person has records to prove the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. 1040a form Table 6-1. 1040a form Tax Base IF the transaction is a. 1040a form . 1040a form . 1040a form THEN figuring the base by using the. 1040a form . 1040a form . 1040a form Sale by the manufacturer, producer, importer, or related person Sales price plus (presumed markup percentage × sales price) Sale by the dealer Total consideration paid for the item including any charges incident to placing it in a condition ready for use Long-term lease by the manufacturer, producer, importer, or related person Constructive sales price plus (presumed markup percentage × constructive sales price) Short-term lease by the manufacturer, producer, importer, or related person Constructive sales price at which such or similar articles are sold Short-term lease by a lessor other than the manufacturer, producer, importer, or related person Price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor plus a presumed markup percentage Short-term lease where the articles are regularly sold at arm's length Lowest established retail price in effect at the time of the taxable use General rule for sales by dealers to the consumer. 1040a form   For a taxable sale, other than a long-term lease, by a person other than a manufacturer, producer, importer, or related person, your tax base is the retail sales price as discussed next under Determination of tax base. 1040a form   When you sell an article to the consumer, generally you do not add a presumed markup to the tax base. 1040a form However, you do add a markup if all the following apply. 1040a form You do not perform any significant activities relating to the processing of the sale of a taxable article. 1040a form The main reason for processing the sale through you is to avoid or evade the presumed markup. 1040a form You do not have records proving that the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. 1040a form In these situations, your tax base is the sales price plus an amount equal to the presumed markup percentage times that selling price. 1040a form Determination of tax base. 1040a form   These rules apply to both normal retail sales price and presumptive retail sales price computations. 1040a form To arrive at the tax base, the price is the total consideration paid (including trade-in allowance) for the item and includes any charge incident to placing the article in a condition ready for use. 1040a form However, see Presumptive retail sales price, earlier. 1040a form Exclusions from tax base. 1040a form   Exclude from the tax base the retail excise tax imposed on the sale. 1040a form Exclude any state or local retail sales tax if stated as a separate charge from the price whether the sales tax is imposed on the seller or purchaser. 1040a form Also exclude the value of any used component of the article furnished by the first user of the article. 1040a form   Exclude charges for transportation, delivery, insurance, and installation (other than installation charges for parts and accessories, discussed earlier) and other expenses incurred in connection with the delivery of an article to a purchaser. 1040a form These expenses are those incurred in delivery from the retail dealer to the customer. 1040a form In the case of delivery directly from the manufacturer to the dealer's customer, include the transportation and delivery charges to the extent the charges do not exceed what it would have cost to ship the article to the dealer. 1040a form   Exclude amounts charged for machinery or equipment that does not contribute to the highway transportation function of the vehicle, provided those charges are supported by adequate records. 1040a form For example, for an industrial vacuum loader vehicle, exclude amounts charged for the vacuum pump and hose, filter system, material separator, silencer or muffler, control cabinet, and ladder. 1040a form Similarly, for a sewer cleaning vehicle, exclude amounts charged for the high pressure water pump, hose components, and the vacuum pipe. 1040a form Sales not at arm's length. 1040a form   For any taxable article sold (not at arm's length) at less than the fair market price, figure the excise tax on the price for which similar articles are sold at retail in the ordinary course of trade. 1040a form   A sale is not at arm's length if either of the following apply. 1040a form One of the parties is controlled (in law or in fact) by the other or there is common control, whether or not the control is actually exercised to influence the sales price. 1040a form The sale is made under special arrangements between a seller and a purchaser. 1040a form Installment sales. 1040a form   If the first retail sale is an installment sale, or other form of sale in which the sales price is paid in installments, tax liability arises at the time of the sale. 1040a form The tax is figured on the entire sales price. 1040a form No part of the tax is deferred because the sales price is paid in installments. 1040a form Repairs and modifications. 1040a form   The tax does not apply to the sale or use of an article that has been repaired or modified unless the cost of the repairs and modifications is more than 75% of the retail price of a comparable new article. 1040a form This includes modifications that change the transportation function of an article or restore a wrecked article to a functional condition. 1040a form However, this exception generally does not apply to an article that was not subject to the tax when it was new. 1040a form Further manufacture. 1040a form   The tax does not apply to the use by a person of a taxable article as material in the manufacture or production of, or as a component part of, another article to be manufactured or produced by that person. 1040a form Do not treat a person as engaged in the manufacture of any article merely because that person combines the article with a: Coupling device (including any fifth wheel); Wrecker crane; Loading and unloading equipment (including any crane, hoist, winch, or power liftgate); Aerial ladder or tower; Ice and snow control equipment; Earth moving, excavation, and construction equipment; Spreader; Sleeper cab; Cab shield; or Wood or metal floor. 1040a form Combining an article with an item in this list does not give rise to taxability. 1040a form However, see Parts or accessories discussed earlier. 1040a form Articles exempt from tax. 1040a form   The tax on heavy trucks, trailers, and tractors does not apply to sales of the articles described in the following discussions. 1040a form Rail trailers and rail vans. 1040a form   This is any chassis or body of a trailer or semitrailer designed for use both as a highway vehicle and a railroad car (including any parts and accessories designed primarily for use on and in connection with it). 1040a form Do not treat a piggyback trailer or semitrailer as designed for use as a railroad car. 1040a form Parts and accessories. 1040a form   This is any part or accessory sold separately from the truck or trailer, except as described earlier under Parts or accessories and Separate purchase. 1040a form Trash containers. 1040a form   This is any box, container, receptacle, bin, or similar article that meets all the following conditions. 1040a form It is designed to be used as a trash container. 1040a form It is not designed to carry freight other than trash. 1040a form It is not designed to be permanently mounted on or affixed to a truck chassis or body. 1040a form House trailers. 1040a form   This is any house trailer (regardless of size) suitable for use in connection with either passenger automobiles or trucks. 1040a form Camper coaches or bodies for self-propelled mobile homes. 1040a form   This is any article designed to be mounted or placed on trucks, truck chassis, or automobile chassis and to be used primarily as living quarters or camping accommodations. 1040a form Further, the tax does not apply to chassis specifically designed and constructed to accommodate and transport self-propelled mobile home bodies. 1040a form Farm feed, seed, and fertilizer equipment. 1040a form   This is any body primarily designed to process or prepare, haul, spread, load, or unload feed, seed, or fertilizer to or on farms. 1040a form This exemption applies only to the farm equipment body (and parts and accessories) and not to the chassis upon which the farm equipment is mounted. 1040a form Ambulances and hearses. 1040a form   This is any ambulance, hearse, or combination ambulance-hearse. 1040a form Truck-tractors. 1040a form   This is any truck-tractor specifically designed for use in shifting semitrailers in and around freight yards and freight terminals. 1040a form Concrete mixers. 1040a form   This is any article designed to be placed or mounted on a truck, truck trailer, or semitrailer chassis to be used to process or prepare concrete. 1040a form This exemption does not apply to the chassis on which the article is mounted. 1040a form Sales exempt from tax. 1040a form   The following sales are ordinarily exempt from tax. 1040a form Sales to a state or local government for its exclusive use. 1040a form Sales to Indian tribal governments, but only if the transaction involves the exercise of an essential tribal government function. 1040a form Sales to a nonprofit educational organization for its exclusive use. 1040a form Sales to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. 1040a form Sales for use by the purchaser for further manufacture of other taxable articles (see below). 1040a form Sales for export or for resale by the purchaser to a second purchaser for export. 1040a form Sales to the United Nations for official use. 1040a form Registration requirement. 1040a form   In general, the seller and buyer must be registered for a sale to be tax free. 1040a form See the Form 637 instructions for more information. 1040a form Certain registration exceptions apply in the case of sales to state and local governments, sales to foreign purchasers for export, and sales for resale or long term leasing. 1040a form Further manufacture. 1040a form   If you buy articles tax free and resell or use them other than in the manufacture of another article, you are liable for the tax on their resale or use just as if you had manufactured and made the first retail sale of them. 1040a form Credits or refunds. 1040a form   A credit or refund (without interest) of the retail tax on the taxable articles described earlier may be allowable if the tax has been paid with respect to an article and, before any other use, such article is used by any person as a component part of another taxable article manufactured or produced. 1040a form The person using the article as a component part is eligible for the credit or refund. 1040a form   A credit or refund is allowable if, before any other use, an article is, by any person: Exported, Used or sold for use as supplies for vessels, Sold to a state or local government for its exclusive use, Sold to a nonprofit educational organization for its exclusive use, or Sold to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. 1040a form A credit or refund is also allowable if there is a price readjustment by reason of the return or repossession of an article or by reason of a bona fide discount, rebate, or allowance. 1040a form   See also Conditions to allowance in chapter 5. 1040a form Tire credit. 1040a form   A credit is allowed against the retail tax on the taxable articles described earlier if taxable tires are sold on or in connection with the sale of the article. 1040a form The credit is equal to the manufacturers excise tax imposed on the taxable tires (discussed earlier). 1040a form This is the section 4051(d) taxable tire credit and is claimed on Schedule C (Form 720) for the same quarter for which the tax on the heavy vehicle is reported. 1040a form Prev  Up  Next   Home   More Online Publications
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The 1040a Form

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