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E File State Taxes

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E File State Taxes

E file state taxes 3. E file state taxes   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). E file state taxes There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. E file state taxes There are also the limitations which may need to be applied if you have a net loss on Schedule E. E file state taxes There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. E file state taxes You may also have a gain or loss related to your rental property from a casualty or theft. E file state taxes This is considered separately from the income and expense information you report on Schedule E. E file state taxes Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). E file state taxes However, do not use that schedule to report a not-for-profit activity. E file state taxes See Not Rented for Profit , in chapter 4. E file state taxes There are also other rental situations in which forms other than Schedule E would be used. E file state taxes Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. E file state taxes , you normally report your rental income and expenses on Schedule E, Part I. E file state taxes List your total income, expenses, and depreciation for each rental property. E file state taxes Be sure to enter the number of fair rental and personal use days on line 2. E file state taxes If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. E file state taxes Complete lines 1 and 2 for each property. E file state taxes However, fill in lines 23a through 26 on only one Schedule E. E file state taxes On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. E file state taxes To find out if you need to attach Form 4562, see Form 4562 , later. E file state taxes If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. E file state taxes Form 6198, At-Risk Limitations. E file state taxes See At-Risk Rules , later. E file state taxes Also see Publication 925. E file state taxes Form 8582, Passive Activity Loss Limitations. E file state taxes See Passive Activity Limits , later. E file state taxes Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. E file state taxes If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. E file state taxes Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). E file state taxes Form 4562. E file state taxes   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. E file state taxes Otherwise, figure your depreciation on your own worksheet. E file state taxes You do not have to attach these computations to your return, but you should keep them in your records for future reference. E file state taxes   See Publication 946 for information on preparing Form 4562. E file state taxes Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. E file state taxes Providing substantial services. E file state taxes   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. E file state taxes Use Form 1065, U. E file state taxes S. E file state taxes Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). E file state taxes Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. E file state taxes For information, see Publication 334, Tax Guide for Small Business. E file state taxes Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. E file state taxes For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. E file state taxes Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. E file state taxes This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. E file state taxes If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). E file state taxes You will not be required to file Form 1065 for any year the election is in effect. E file state taxes Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. E file state taxes If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. E file state taxes For more information on qualified joint ventures, go to IRS. E file state taxes gov and enter “qualified joint venture” in the search box. E file state taxes Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. E file state taxes You must consider these rules in the order shown below. E file state taxes Both are discussed in this section. E file state taxes At-risk rules. E file state taxes These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. E file state taxes This applies only if the real property was placed in service after 1986. E file state taxes Passive activity limits. E file state taxes Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. E file state taxes However, there are exceptions. E file state taxes At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. E file state taxes Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. E file state taxes In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. E file state taxes You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. E file state taxes Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. E file state taxes See Publication 925 for a discussion of the at-risk rules. E file state taxes Form 6198. E file state taxes   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. E file state taxes Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. E file state taxes For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. E file state taxes For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. E file state taxes Deductions or losses from passive activities are limited. E file state taxes You generally cannot offset income, other than passive income, with losses from passive activities. E file state taxes Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. E file state taxes Any excess loss or credit is carried forward to the next tax year. E file state taxes Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. E file state taxes For a detailed discussion of these rules, see Publication 925. E file state taxes Real estate professionals. E file state taxes   If you are a real estate professional, complete line 43 of Schedule E. E file state taxes      You qualify as a real estate professional for the tax year if you meet both of the following requirements. E file state taxes More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. E file state taxes You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. E file state taxes If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. E file state taxes For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. E file state taxes   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. E file state taxes You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. E file state taxes   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. E file state taxes However, you can count your spouse's participation in an activity in determining if you materially participated. E file state taxes Real property trades or businesses. E file state taxes   A real property trade or business is a trade or business that does any of the following with real property. E file state taxes Develops or redevelops it. E file state taxes Constructs or reconstructs it. E file state taxes Acquires it. E file state taxes Converts it. E file state taxes Rents or leases it. E file state taxes Operates or manages it. E file state taxes Brokers it. E file state taxes Choice to treat all interests as one activity. E file state taxes   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. E file state taxes You can make this choice for any year that you qualify as a real estate professional. E file state taxes If you forgo making the choice for one year, you can still make it for a later year. E file state taxes   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. E file state taxes This is true even if you are not a real estate professional in any intervening year. E file state taxes (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. E file state taxes )   See the Instructions for Schedule E for information about making this choice. E file state taxes Material participation. E file state taxes   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. E file state taxes For details, see Publication 925 or the Instructions for Schedule C. E file state taxes Participating spouse. E file state taxes   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. E file state taxes Do this even if your spouse owns no interest in the activity or files a separate return for the year. E file state taxes Form 8582. E file state taxes    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. E file state taxes See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. E file state taxes   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. E file state taxes Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. E file state taxes Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). E file state taxes Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. E file state taxes This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. E file state taxes Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. E file state taxes Example. E file state taxes Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. E file state taxes $2,000 of Jane's $3,500 loss offsets her passive income. E file state taxes The remaining $1,500 loss can be deducted from her $40,000 wages. E file state taxes The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. E file state taxes Active participation. E file state taxes   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. E file state taxes Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. E file state taxes Example. E file state taxes Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. E file state taxes Mike had advertised and rented the house to the current tenant himself. E file state taxes He also collected the rents, which usually came by mail. E file state taxes All repairs were either made or contracted out by Mike. E file state taxes Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. E file state taxes Maximum special allowance. E file state taxes   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. E file state taxes   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. E file state taxes If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. E file state taxes   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. E file state taxes Modified adjusted gross income (MAGI). E file state taxes   This is your adjusted gross income from Form 1040, U. E file state taxes S. E file state taxes Individual Income Tax Return, line 38, or Form 1040NR, U. E file state taxes S. E file state taxes Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. E file state taxes S. E file state taxes savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). E file state taxes Form 8582 not required. E file state taxes   Do not complete Form 8582 if you meet all of the following conditions. E file state taxes Your only passive activities were rental real estate activities in which you actively participated. E file state taxes Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). E file state taxes If married filing separately, you lived apart from your spouse all year. E file state taxes You have no prior year unallowed losses from these (or any other passive) activities. E file state taxes You have no current or prior year unallowed credits from passive activities. E file state taxes Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). E file state taxes You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. E file state taxes   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. E file state taxes On lines 23a through 23e of your Schedule E, enter the applicable amounts. E file state taxes Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. E file state taxes You may be able to deduct the loss on your income tax return. E file state taxes Casualty. E file state taxes   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. E file state taxes Such events include a storm, fire, or earthquake. E file state taxes Theft. E file state taxes   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. E file state taxes Gain from casualty or theft. E file state taxes   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. E file state taxes Generally, you must report this gain. E file state taxes However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. E file state taxes To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. E file state taxes In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. E file state taxes The cost of the replacement property must be equal to or more than the net insurance or other payment you received. E file state taxes More information. E file state taxes   For information on business and nonbusiness casualty and theft losses, see Publication 547. E file state taxes How to report. E file state taxes    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. E file state taxes Follow the Instructions for Form 4684 for where to carry your net gain or loss. E file state taxes Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. E file state taxes In 2013, she rented it all 12 months for a monthly rental fee of $1,125. E file state taxes In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. E file state taxes Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. E file state taxes This means using the straight line method over a recovery period of 27. E file state taxes 5 years. E file state taxes She uses Table 2-2d to find her depreciation percentage. E file state taxes Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. E file state taxes For year 6, the rate is 3. E file state taxes 636%. E file state taxes Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. E file state taxes 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. E file state taxes Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. E file state taxes Marie also meets all of the requirements for not having to file Form 8582. E file state taxes She uses Schedule E, Part I, to report her rental income and expenses. E file state taxes She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. E file state taxes Form 4562 is not required. E file state taxes Prev  Up  Next   Home   More Online Publications
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The E File State Taxes

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