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Free online tax extension Index A Accelerated death benefits, Accelerated Death Benefits, Accelerated death benefits. Free online tax extension Archer MSA, HSA, Archer MSA, or Medicare Advantage MSA, HSA, Archer MSA, or a Medicare Advantage MSA. Free online tax extension Assistance (see Tax help) Astronauts Tax forgiveness, Astronauts B Basis Inherited property, Basis of Inherited Property Joint interest property, Joint interest. Free online tax extension Qualified joint interest, Qualified joint interest. Free online tax extension Beneficiary Basis of property, Basis of Inherited Property Character of distributions, Character of Distributions Excess deductions, Excess deductions. Free online tax extension Income received, Other Items of Income Liability, estate's income tax, Liability of the beneficiary. Free online tax extension Nonresident alien, Nonresident alien beneficiary. Free online tax extension Reporting distributions, How and When To Report Successor, Successor beneficiary. Free online tax extension Treatment of distributions, Distributions to Beneficiaries Unused loss carryovers, Unused loss carryovers. Free online tax extension Bequest Defined, Bequest Property received, Gifts, Insurance, and Inheritances C Claim, credit or refund, Claim for Credit or Refund Combat zone, Combat Zone Comments, Comments and suggestions. Free online tax extension Coverdell education savings account (ESA), Coverdell Education Savings Account (ESA), Coverdell education savings account (ESA). Free online tax extension Credit Child tax, Child tax credit. Free online tax extension Earned income, Earned income credit. Free online tax extension Elderly or disabled, Credit for the elderly or the disabled. Free online tax extension Final return for decedent, Credits General business, General business tax credit. Free online tax extension D Death benefits Accelerated, Accelerated Death Benefits, Accelerated death benefits. Free online tax extension Public safety officers, Death benefits. Free online tax extension Decedent Final return, Final Income Tax Return for Decedent—Form 1040 Income in respect of, Income in Respect of a Decedent Deductions Estate tax, Estate Tax Deduction In respect of decedent, Deductions in Respect of a Decedent Medical expenses, Medical Expenses Standard, Standard Deduction Distributable net income, Distributable net income. Free online tax extension Distributions Deduction, Income Distribution Deduction Limit on deduction, Tax-exempt income not deductible. Free online tax extension Not treated as bequests, Distributions not treated as bequests. Free online tax extension Property, in kind, Property distributed in kind. Free online tax extension E Education savings account, Coverdell, Coverdell Education Savings Account (ESA), Coverdell education savings account (ESA). Free online tax extension Estate Income tax return, Income Tax Return of an Estate— Form 1041 Insolvent, Insolvent estate. Free online tax extension Period of administration, Period of Administration Tax deduction, Estate Tax Deduction Termination, Termination of Estate Transfer of unused deductions, Transfer of Unused Deductions to Beneficiaries Estate tax deduction, Estate Tax Deduction Estimated tax, Estimated tax. Free online tax extension , Transfer of Credit for Estimated Tax Payments Example Comprehensive, Comprehensive Example Decedent's final return, Final Return for Decedent—Form 1040 Estate's tax return, Income Tax Return of an Estate—Form 1041 Exemption Estate's tax return, Exemption Deduction Final return for decedent, Exemptions Expenses Accrued, Accrued expenses. Free online tax extension Administration, Administration Expenses Deductions in respect of decedent, Deductions in Respect of a Decedent Funeral, Funeral and Medical Expenses Medical, Medical Expenses, Medical and dental expenses of a decedent. Free online tax extension Extension to file Form 1041, Extension of time to file. Free online tax extension F Fiduciary relationship, Notice of fiduciary relationship. Free online tax extension Filing requirements Decedent's final return, Filing Requirements Estate's tax return, Filing Requirements Final return for decedent Credits, Credits Exemption and deductions, Exemptions and Deductions Filing requirements, Filing Requirements Income to include, Income To Include Joint return, Joint Return Name, address, and signature, Name, Address, and Signature Other taxes, Other Taxes Payments, Payments of Tax When and where to file, When and Where To File Who must file, Final Income Tax Return for Decedent—Form 1040 Form 1040NR, Nonresident Alien, Filing Requirements 1041, Income Tax Return of an Estate— Form 1041 1042, Nonresident alien beneficiary. Free online tax extension 1310, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Free online tax extension 4810, Form 4810. Free online tax extension 56, Notice of fiduciary relationship. Free online tax extension 6251, Form 6251. Free online tax extension 706, Estate and Gift Taxes SS–4, Identification number. Free online tax extension Free tax services, Free help with your tax return. Free online tax extension Funeral expenses, Funeral expenses. Free online tax extension G Gift, property, Gifts, Insurance, and Inheritances H Help (see Tax help) I Identification number, application, Identification number. Free online tax extension Income Community, Community Income Distributable net income, Distributable net income. Free online tax extension Distributed currently, Income That Must Be Distributed Currently Interest and dividend, Interest and Dividend Income (Forms 1099) Partnership, final return, Partnership Income S corporation, S Corporation Income Self-employment, Self-Employment Income Income in respect of decedent, Income in Respect of a Decedent, Inherited IRAs. Free online tax extension Income tax return of an estate Credits, tax, and payments, Credits, Tax, and Payments Exemption and deductions, Exemption and Deductions Filing requirements, Filing Requirements Income to include, Income To Include Name, address, and signature, Name, Address, and Signature When and where to file, When and Where To File Inherited IRAs, Inherited IRAs. Free online tax extension Inherited property, Gifts, Insurance, and Inheritances Installment obligations, Installment obligations. Free online tax extension , Installment obligations. Free online tax extension Insurance, Insurance J Joint return Revoked by personal representative, Personal representative may revoke joint return election. Free online tax extension Who can file, Joint Return L Losses Deduction on final return, Deduction for Losses Estate's tax return, Losses M Military or terrorist actions Claim for credit or refund, Claim for Credit or Refund Defined, Military or terrorist action defined. Free online tax extension Tax forgiveness, Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts N Notice of fiduciary relationship Form 56, Notice of fiduciary relationship. Free online tax extension P Partnership income, Partnership Income, Partnership income. Free online tax extension Penalty Information returns, Penalty. Free online tax extension Substantial valuation misstatement, Valuation misstatements. Free online tax extension Personal representative Defined, Personal Representative Duties, Duties Fees received, Fees Received by Personal Representatives Penalty, Penalty. Free online tax extension , Penalty. Free online tax extension Prompt assessment, request, Request for prompt assessment (charge) of tax. Free online tax extension Public safety officers, death benefits, Death benefits. Free online tax extension Publications (see Tax help) R Refund File for decedent, Refund Military or terrorist action deaths, Claim for Credit or Refund Release from liability, Request for discharge from personal liability for tax. Free online tax extension Return Decedent's final, Final Income Tax Return for Decedent—Form 1040 Estate's income tax, Income Tax Return of an Estate— Form 1041 Information, Information Returns Roth IRA, Roth IRAs. Free online tax extension S Separate shares rule, Separate shares rule. Free online tax extension Suggestions, Comments and suggestions. Free online tax extension Survivors Income, Other Items of Income Tax benefits, Tax Benefits for Survivors T Tax Alternative minimum Estate, Alternative minimum tax (AMT). Free online tax extension Individuals, Alternative minimum tax (AMT). Free online tax extension Benefits, survivors, Tax Benefits for Survivors Estimated, estate, Estimated tax. Free online tax extension , Transfer of Credit for Estimated Tax Payments Payments, final return, Payments of Tax Refund of income (claim), Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Free online tax extension Self-employment, Self-employment tax. Free online tax extension Transfer of credit, Transfer of Credit for Estimated Tax Payments Tax help, How To Get Tax Help Terrorist action, tax relief, Tax Forgiveness for Armed Forces Members, Victims of Terrorism, and Astronauts Terrorist victim, Specified Terrorist Victim TTY/TDD information, How To Get Tax Help V Valuation method Inherited property, Basis of Inherited Property Special-use, Special-use valuation. Free online tax extension Victims of terrorist attacks, Specified Terrorist Victim W Widows and widowers, tax benefits, Qualifying widows and widowers. Free online tax extension Prev  Up     Home   More Online Publications
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The Free Online Tax Extension

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