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H&r block com 4. H&r block com   General Business Credits Table of Contents Introduction Useful Items - You may want to see: Business Credits How To Claim the Credit Introduction Your general business credit for the year consists of your carryforward of business credits from prior years plus the total of your current year business credits. H&r block com In addition, your general business credit for the current year may be increased later by the carryback of business credits from later years. H&r block com You subtract this credit directly from your tax. H&r block com Useful Items - You may want to see: Form (and Instructions) 3800 General Business Credit 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. H&r block com Business Credits All of the following credits are part of the general business credit. H&r block com The form you use to figure each credit is shown in parentheses. H&r block com You will also have to complete Form 3800. H&r block com Alternative fuel vehicle refueling property credit (Form 8911). H&r block com   This credit applies to the cost of any qualified fuel vehicle refueling property you placed in service. H&r block com For more information, see Form 8911. H&r block com Alternative motor vehicle credit (Form 8910). H&r block com   For more information, see Form 8910. H&r block com Biodiesel and renewable diesel fuels credit (Form 8864). H&r block com   For more information, see Form 8864. H&r block com Biofuel producer credit (Form 6478). H&r block com    For more information, see Form 6478. H&r block com Carbon dioxide sequestration credit (Form 8933). H&r block com   This credit is for carbon dioxide which is captured at a qualified facility and disposed of in a secure geological storage or used in a qualified enhanced oil or natural gas recovery project. H&r block com For more information, see Form 8933. H&r block com Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846). H&r block com   This credit is generally equal to your (employer's) portion of social security and Medicare taxes paid on tips received by employees of your food and beverage establishment where tipping is customary. H&r block com The credit applies regardless of whether the food is consumed on or off your business premises. H&r block com For more information, see Form 8846. H&r block com Credit for employer differential wage payments (Form 8932). H&r block com   This credit provides certain small businesses with an incentive to continue to pay wages to an employee performing services on active duty in the uniformed services of the United States for a period of more than 30 days. H&r block com For more information, see Form 8932. H&r block com Credit for employer-provided childcare facilities and services (Form 8882). H&r block com   This credit applies to the qualified expenses you paid for employee childcare and qualified expenses you paid for childcare resource and referral services. H&r block com For more information, see Form 8882. H&r block com Credit for increasing research activities (Form 6765). H&r block com   This credit is designed to encourage businesses to increase the amounts they spend on research and experimental activities, including energy research. H&r block com For more information, see Form 6765. H&r block com Credit for small employer health insurance premiums (Form 8941). H&r block com   This credit applies to the cost of certain health insurance coverage you provide to certain employees. H&r block com For more information, see Form 8941. H&r block com Credit for small employer pension plan startup costs (Form 8881). H&r block com   This credit applies to pension plan startup costs of a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. H&r block com For more information, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). H&r block com Disabled access credit (Form 8826). H&r block com   This credit is a nonrefundable tax credit for an eligible small business that pays or incurs expenses to provide access to persons who have disabilities. H&r block com You must pay or incur the expenses to enable your business to comply with the Americans with Disabilities Act of 1990. H&r block com For more information, see Form 8826. H&r block com Distilled spirits credit (Form 8906). H&r block com   This credit is available to distillers and importers of distilled spirits and eligible wholesalers of distilled spirits. H&r block com For more information, see Form 8906. H&r block com Empowerment zone employment credit (Form 8844). H&r block com   You may qualify for this credit if you have employees and are engaged in a business in an empowerment zone for which the credit is available. H&r block com For more information, see Form 8844. H&r block com Energy efficient appliance credit (Form 8909). H&r block com   This credit is available for manufacturers of eligible appliances. H&r block com For more information, see Form 8909. H&r block com Energy efficient home credit (Form 8908). H&r block com   This credit is available for eligible contractors of certain homes sold for use as a residence. H&r block com For more information, see Form 8908. H&r block com Indian employment credit (Form 8845). H&r block com   This credit applies to qualified wages and health insurance costs you paid or incurred for qualified employees. H&r block com For more information, see Form 8845. H&r block com Investment credit (Form 3468). H&r block com   The investment credit is the total of the following credits. H&r block com Rehabilitation credit. H&r block com Energy credit. H&r block com Qualifying advanced coal project credit. H&r block com Qualifying gasification project credit. H&r block com Qualifying advanced energy project credit. H&r block com   For more information, see Form 3468. H&r block com Low sulfur diesel fuel production credit (Form 8896). H&r block com    For more information, see Form 8896. H&r block com Low-income housing credit (Form 8586). H&r block com   This credit generally applies to each new qualified low-income building placed in service after 1986. H&r block com For more information, see Form 8586. H&r block com Mine rescue team training credit (Form 8923). H&r block com   This credit applies to training program costs you pay or incur for certain mine rescue team employees. H&r block com For more information, see Form 8923. H&r block com New markets credit (Form 8874). H&r block com   This credit is for qualified equity investments made in qualified community development entities. H&r block com For more information, see Form 8874. H&r block com Nonconventional source fuel credit (Form 8907). H&r block com   This credit is for qualified coke and coke gas you produced and sold to an unrelated person during the tax year. H&r block com For more information, see Form 8907. H&r block com Orphan drug credit (Form 8820). H&r block com   This credit applies to qualified expenses incurred in testing certain drugs for rare diseases and conditions. H&r block com For more information, see Form 8820. H&r block com Qualified plug-in electric drive motor vehicle credit (Form 8936). H&r block com   This credit is for certain new qualified plug-in electric vehicles placed in service during the tax year. H&r block com For more information, see Form 8936. H&r block com Qualified railroad track maintenance credit (Form 8900). H&r block com   This credit applies with respect to qualified railroad track maintenance expenditures paid or incurred during the tax year. H&r block com For more information, see Form 8900. H&r block com Renewable electricity, refined coal, and Indian coal production credit (Form 8835). H&r block com   This credit is for the sale of electricity, refined coal, or Indian coal produced in the United States or U. H&r block com S. H&r block com possessions from qualified energy resources at a qualified facility. H&r block com For more information, see Form 8835. H&r block com Work opportunity credit (Form 5884). H&r block com   This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. H&r block com For more information, see Form 5884. H&r block com How To Claim the Credit To claim a general business credit, you will first have to get the forms you need to claim your current year business credits. H&r block com In addition to the credit form, you also need to file Form 3800. H&r block com Prev  Up  Next   Home   More Online Publications
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H&r block com Publication 936 - Main Content Table of Contents Part I. H&r block com 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. H&r block com 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. H&r block com Home Mortgage Interest This part explains what you can deduct as home mortgage interest. H&r block com It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. H&r block com Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). H&r block com The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. H&r block com You can deduct home mortgage interest if all the following conditions are met. H&r block com You file Form 1040 and itemize deductions on Schedule A (Form 1040). H&r block com The mortgage is a secured debt on a qualified home in which you have an ownership interest. H&r block com Secured Debt and Qualified Home are explained later. H&r block com  Both you and the lender must intend that the loan be repaid. H&r block com Fully deductible interest. H&r block com   In most cases, you can deduct all of your home mortgage interest. H&r block com How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. H&r block com   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. H&r block com (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. H&r block com ) 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. H&r block com   The three categories are as follows. H&r block com Mortgages you took out on or before October 13, 1987 (called grandfathered debt). H&r block com 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). H&r block com 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). H&r block com The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. H&r block com   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. H&r block com    You can use Figure A to check whether your home mortgage interest is fully deductible. H&r block com This image is too large to be displayed in the current screen. H&r block com Please click the link to view the image. H&r block com Figure A. H&r block com Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. H&r block com 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. H&r block com In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. H&r block com If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. H&r block com In this publication, mortgage will refer to secured debt. H&r block com Debt not secured by home. H&r block com   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). H&r block com   A debt is not secured by your home if it once was, but is no longer secured by your home. H&r block com Wraparound mortgage. H&r block com   This is not a secured debt unless it is recorded or otherwise perfected under state law. H&r block com Example. H&r block com Beth owns a home subject to a mortgage of $40,000. H&r block com She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. H&r block com Beth continues to make the payments on the $40,000 note. H&r block com John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. H&r block com Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. H&r block com Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. H&r block com Choice to treat the debt as not secured by your home. H&r block com   You can choose to treat any debt secured by your qualified home as not secured by the home. H&r block com This treatment begins with the tax year for which you make the choice and continues for all later tax years. H&r block com You can revoke your choice only with the consent of the Internal Revenue Service (IRS). H&r block com   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. H&r block com 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. H&r block com Cooperative apartment owner. H&r block com   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. H&r block com Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. H&r block com This means your main home or your second home. H&r block com A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. H&r block com 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. H&r block com Otherwise, it is considered personal interest and is not deductible. H&r block com Main home. H&r block com   You can have only one main home at any one time. H&r block com This is the home where you ordinarily live most of the time. H&r block com Second home. H&r block com   A second home is a home that you choose to treat as your second home. H&r block com Second home not rented out. H&r block com   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. H&r block com You do not have to use the home during the year. H&r block com Second home rented out. H&r block com   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. H&r block com 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. H&r block com If you do not use the home long enough, it is considered rental property and not a second home. H&r block com For information on residential rental property, see Publication 527. H&r block com More than one second home. H&r block com   If you have more than one second home, you can treat only one as the qualified second home during any year. H&r block com However, you can change the home you treat as a second home during the year in the following situations. H&r block com 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. H&r block com 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. H&r block com 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. H&r block com Divided use of your home. H&r block com   The only part of your home that is considered a qualified home is the part you use for residential living. H&r block com 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. H&r block com 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. H&r block com 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. H&r block com (See Home Acquisition Debt in Part II. H&r block com ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . H&r block com Renting out part of home. H&r block com   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. H&r block com The rented part of your home is used by the tenant primarily for residential living. H&r block com The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. H&r block com 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. H&r block com If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. H&r block com Office in home. H&r block com   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. H&r block com It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. H&r block com Home under construction. H&r block com   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. H&r block com   The 24-month period can start any time on or after the day construction begins. H&r block com Home destroyed. H&r block com   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. H&r block com This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. H&r block com   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. H&r block com   This rule applies to your main home and to a second home that you treat as a qualified home. H&r block com Time-sharing arrangements. H&r block com   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. H&r block com 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. H&r block com Rental of time-share. H&r block com   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. H&r block com See Second home rented out , earlier, for the use requirement. H&r block com 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. H&r block com Married taxpayers. H&r block com   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. H&r block com Separate returns. H&r block com   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. H&r block com However, if you both consent in writing, then one spouse can take both the main home and a second home into account. H&r block com Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. H&r block com It also describes certain special situations that may affect your deduction. H&r block com Late payment charge on mortgage payment. H&r block com   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. H&r block com Mortgage prepayment penalty. H&r block com   If you pay off your home mortgage early, you may have to pay a penalty. H&r block com 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. H&r block com Sale of home. H&r block com   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. H&r block com Example. H&r block com John and Peggy Harris sold their home on May 7. H&r block com Through April 30, they made home mortgage interest payments of $1,220. H&r block com 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. H&r block com Their mortgage interest deduction is $1,270 ($1,220 + $50). H&r block com Prepaid interest. H&r block com   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. H&r block com You can deduct in each year only the interest that qualifies as home mortgage interest for that year. H&r block com However, there is an exception that applies to points, discussed later. H&r block com Mortgage interest credit. H&r block com    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. H&r block com Figure the credit on Form 8396, Mortgage Interest Credit. H&r block com If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. H&r block com   See Form 8396 and Publication 530 for more information on the mortgage interest credit. H&r block com Ministers' and military housing allowance. H&r block com   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. H&r block com Hardest Hit Fund and Emergency Homeowners' Loan Programs. H&r block com   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. H&r block com 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. H&r block com 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. H&r block com 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). H&r block com 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. H&r block com Mortgage assistance payments under section 235 of the National Housing Act. H&r block com   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. H&r block com You cannot deduct the interest that is paid for you. H&r block com No other effect on taxes. H&r block com   Do not include these mortgage assistance payments in your income. H&r block com Also, do not use these payments to reduce other deductions, such as real estate taxes. H&r block com Divorced or separated individuals. H&r block com   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. H&r block com See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. H&r block com Redeemable ground rents. H&r block com   In some states (such as Maryland), you can buy your home subject to a ground rent. H&r block com A ground rent is an obligation you assume to pay a fixed amount per year on the property. H&r block com Under this arrangement, you are leasing (rather than buying) the land on which your home is located. H&r block com   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. H&r block com   A ground rent is a redeemable ground rent if all of the following are true. H&r block com Your lease, including renewal periods, is for more than 15 years. H&r block com You can freely assign the lease. H&r block com 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. H&r block com The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. H&r block com   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. H&r block com Nonredeemable ground rents. H&r block com   Payments on a nonredeemable ground rent are not mortgage interest. H&r block com You can deduct them as rent if they are a business expense or if they are for rental property. H&r block com Reverse mortgages. H&r block com   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. H&r block com With a reverse mortgage, you retain title to your home. H&r block com 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. H&r block com Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. H&r block com 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. H&r block com Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. H&r block com Rental payments. H&r block com   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. H&r block com This is true even if the settlement papers call them interest. H&r block com You cannot deduct these payments as home mortgage interest. H&r block com Mortgage proceeds invested in tax-exempt securities. H&r block com   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. H&r block com “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. H&r block com Refunds of interest. H&r block com   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. H&r block com 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. H&r block com However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. H&r block com This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. H&r block com If you need to include the refund in income, report it on Form 1040, line 21. H&r block com   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. H&r block com For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. H&r block com   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. H&r block com Cooperative apartment owner. H&r block com   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. H&r block com The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. H&r block com   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. H&r block com Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. H&r block com Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. H&r block com This image is too large to be displayed in the current screen. H&r block com Please click the link to view the image. H&r block com Figure B. H&r block com 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. H&r block com See Points paid by the seller , later. H&r block com General Rule You generally cannot deduct the full amount of points in the year paid. H&r block com Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. H&r block com See Deduction Allowed Ratably , next. H&r block com For exceptions to the general rule, see Deduction Allowed in Year Paid , later. H&r block com 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. H&r block com You use the cash method of accounting. H&r block com This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block com Most individuals use this method. H&r block com Your loan is secured by a home. H&r block com (The home does not need to be your main home. H&r block com ) Your loan period is not more than 30 years. H&r block com 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. H&r block com 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. H&r block com Example. H&r block com You use the cash method of accounting. H&r block com In 2013, you took out a $100,000 loan payable over 20 years. H&r block com The terms of the loan are the same as for other 20-year loans offered in your area. H&r block com You paid $4,800 in points. H&r block com You made 3 monthly payments on the loan in 2013. H&r block com You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. H&r block com In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). H&r block com Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. H&r block com (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. H&r block com ) Your loan is secured by your main home. H&r block com (Your main home is the one you ordinarily live in most of the time. H&r block com ) Paying points is an established business practice in the area where the loan was made. H&r block com The points paid were not more than the points generally charged in that area. H&r block com You use the cash method of accounting. H&r block com This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block com Most individuals use this method. H&r block com 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. H&r block com The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. H&r block com The funds you provided are not required to have been applied to the points. H&r block com They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. H&r block com You cannot have borrowed these funds from your lender or mortgage broker. H&r block com You use your loan to buy or build your main home. H&r block com The points were computed as a percentage of the principal amount of the mortgage. H&r block com The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. H&r block com The points may be shown as paid from either your funds or the seller's. H&r block com Note. H&r block com 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. H&r block com Home improvement loan. H&r block com   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. H&r block com Second home. H&r block com You cannot fully deduct in the year paid points you pay on loans secured by your second home. H&r block com You can deduct these points only over the life of the loan. H&r block com Refinancing. H&r block com   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. H&r block com This is true even if the new mortgage is secured by your main home. H&r block com   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. H&r block com You can deduct the rest of the points over the life of the loan. H&r block com Example 1. H&r block com In 1998, Bill Fields got a mortgage to buy a home. H&r block com In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. H&r block com The mortgage is secured by his home. H&r block com To get the new loan, he had to pay three points ($3,000). H&r block com 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. H&r block com Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. H&r block com The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. H&r block com Bill's first payment on the new loan was due July 1. H&r block com He made six payments on the loan in 2013 and is a cash basis taxpayer. H&r block com Bill used the funds from the new mortgage to repay his existing mortgage. H&r block com 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. H&r block com He cannot deduct all of the points in 2013. H&r block com He can deduct two points ($2,000) ratably over the life of the loan. H&r block com He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. H&r block com The other point ($1,000) was a fee for services and is not deductible. H&r block com Example 2. H&r block com 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. H&r block com Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. H&r block com His deduction is $500 ($2,000 × 25%). H&r block com Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. H&r block com This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. H&r block com The total amount Bill deducts in 2013 is $550 ($500 + $50). H&r block com Special Situations This section describes certain special situations that may affect your deduction of points. H&r block com Original issue discount. H&r block com   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. H&r block com This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. H&r block com Amounts charged for services. H&r block com    Amounts charged by the lender for specific services connected to the loan are not interest. H&r block com Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. H&r block com  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. H&r block com Points paid by the seller. H&r block com   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. H&r block com Treatment by seller. H&r block com   The seller cannot deduct these fees as interest. H&r block com But they are a selling expense that reduces the amount realized by the seller. H&r block com See Publication 523 for information on selling your home. H&r block com Treatment by buyer. H&r block com   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. H&r block com If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. H&r block com If any of those tests are not met, the buyer deducts the points over the life of the loan. H&r block com   If you need information about the basis of your home, see Publication 523 or Publication 530. H&r block com Funds provided are less than points. H&r block com   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. H&r block com In addition, you can deduct any points paid by the seller. H&r block com Example 1. H&r block com When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). H&r block com You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. H&r block com Of the $1,000 charged for points, you can deduct $750 in the year paid. H&r block com You spread the remaining $250 over the life of the mortgage. H&r block com Example 2. H&r block com 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. H&r block com In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). H&r block com You spread the remaining $250 over the life of the mortgage. H&r block com You must reduce the basis of your home by the $1,000 paid by the seller. H&r block com Excess points. H&r block com   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. H&r block com You must spread any additional points over the life of the mortgage. H&r block com Mortgage ending early. H&r block com   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. H&r block com However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. H&r block com Instead, deduct the remaining balance over the term of the new loan. H&r block com   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. H&r block com Example. H&r block com Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. H&r block com He deducts $200 points per year. H&r block com Through 2012, Dan has deducted $2,200 of the points. H&r block com Dan prepaid his mortgage in full in 2013. H&r block com He can deduct the remaining $800 of points in 2013. H&r block com Limits on deduction. H&r block com   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . H&r block com See the Table 1 Instructions for line 10. H&r block com Form 1098. H&r block com    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. H&r block com See Form 1098, Mortgage Interest Statement , later. H&r block com Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. H&r block com The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. H&r block com Qualified mortgage insurance. H&r block com   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). H&r block com   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. H&r block com If provided by the Rural Housing Service, it is commonly known as a guarantee fee. H&r block com 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. H&r block com These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. H&r block com Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. H&r block com Special rules for prepaid mortgage insurance. H&r block com   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. H&r block com 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. H&r block com No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. H&r block com This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. H&r block com Example. H&r block com Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. H&r block com Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. H&r block com 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. H&r block com Ryan's adjusted gross income (AGI) for 2012 is $76,000. H&r block com Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. H&r block com For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. H&r block com 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). H&r block com Limit on deduction. H&r block com   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. H&r block com 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. H&r block com If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. H&r block com Form 1098. H&r block com   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. H&r block com See Form 1098, Mortgage Interest Statement, next. H&r block com 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. H&r block com 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. H&r block com A governmental unit is a person for purposes of furnishing the statement. H&r block com The statement for each year should be sent to you by January 31 of the following year. H&r block com A copy of this form will also be sent to the IRS. H&r block com 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. H&r block com However, it should not show any interest that was paid for you by a government agency. H&r block com As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. H&r block com However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. H&r block com See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. H&r block com Prepaid interest on Form 1098. H&r block com   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. H&r block com However, you cannot deduct the prepaid amount for January 2014 in 2013. H&r block com (See Prepaid interest , earlier. H&r block com ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. H&r block com You will include the interest for January 2014 with other interest you pay for 2014. H&r block com Refunded interest. H&r block com   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. H&r block com See Refunds of interest , earlier. H&r block com Mortgage insurance premiums. H&r block com   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. H&r block com See Mortgage Insurance Premiums , earlier. H&r block com How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. H&r block com 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. H&r block com Attach a statement explaining the difference and print “See attached” next to line 10. H&r block com Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. H&r block com 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. H&r block com The seller must give you this number and you must give the seller your TIN. H&r block com A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. H&r block com Failure to meet any of these requirements may result in a $50 penalty for each failure. H&r block com 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. H&r block com 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. H&r block com Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block com More than one borrower. H&r block com   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. H&r block com Show how much of the interest each of you paid, and give the name and address of the person who received the form. H&r block com Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. H&r block com Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block com   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. H&r block com Let each of the other borrowers know what his or her share is. H&r block com Mortgage proceeds used for business or investment. H&r block com   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. H&r block com It shows where to deduct the part of your excess interest that is for those activities. H&r block com 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. H&r block com Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. H&r block com This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. H&r block com Cooperative housing corporation. H&r block com   This is a corporation that meets all of the following conditions. H&r block com 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. H&r block com Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. H&r block com For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. H&r block com 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. H&r block com 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. H&r block com Stock used to secure debt. H&r block com   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). H&r block com 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. H&r block com See chapter 4 of Publication 535 for details on these rules. H&r block com Figuring deductible home mortgage interest. H&r block com   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. H&r block com 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. H&r block com   Figure your share of this interest by multiplying the total by the following fraction. H&r block com      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. H&r block com   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. H&r block com The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. H&r block com (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. H&r block com ) 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. H&r block com Form 1098. H&r block com    The cooperative should give you a Form 1098 showing your share of the interest. H&r block com Use the rules in this publication to determine your deductible mortgage interest. H&r block com Part II. H&r block com Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. H&r block com 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 . H&r block com 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. H&r block com 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. H&r block com Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. H&r block com 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). H&r block com It also must be secured by that home. H&r block com 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. H&r block com The additional debt may qualify as home equity debt (discussed later). H&r block com Home acquisition debt limit. H&r block com   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). H&r block com This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). H&r block com Debt over this limit may qualify as home equity debt (also discussed later). H&r block com Refinanced home acquisition debt. H&r block com   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. H&r block com 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. H&r block com 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). H&r block com Mortgage that qualifies later. H&r block com   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. H&r block com 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. H&r block com However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. H&r block com Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. H&r block com However, if the property later becomes a qualified home, the debt may qualify after that time. H&r block com Mortgage treated as used to buy, build, or improve home. H&r block com   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. H&r block com This applies in the following situations. H&r block com You buy your home within 90 days before or after the date you take out the mortgage. H&r block com 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). H&r block com (See Example 1 later. H&r block com ) You build or improve your home and take out the mortgage before the work is completed. H&r block com The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. H&r block com You build or improve your home and take out the mortgage within 90 days after the work is completed. H&r block com 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. H&r block com (See Example 2 later. H&r block com ) Example 1. H&r block com You bought your main home on June 3 for $175,000. H&r block com You paid for the home with cash you got from the sale of your old home. H&r block com On July 15, you took out a mortgage of $150,000 secured by your main home. H&r block com You used the $150,000 to invest in stocks. H&r block com 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. H&r block com The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. H&r block com Example 2. H&r block com On January 31, John began building a home on the lot that he owned. H&r block com He used $45,000 of his personal funds to build the home. H&r block com The home was completed on October 31. H&r block com On November 21, John took out a $36,000 mortgage that was secured by the home. H&r block com The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. H&r block com 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. H&r block com This is illustrated by Figure C. H&r block com   Please click here for the text description of the image. H&r block com Figure C. H&r block com John's example Date of the mortgage. H&r block com   The date you take out your mortgage is the day the loan proceeds are disbursed. H&r block com This is generally the closing date. H&r block com You can treat the day you apply in writing for your mortgage as the date you take it out. H&r block com However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. H&r block com If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. H&r block com Cost of home or improvements. H&r block com   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. H&r block com   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. H&r block com Substantial improvement. H&r block com   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. H&r block com    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. H&r block com 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. H&r block com Acquiring an interest in a home because of a divorce. H&r block com   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. H&r block com Part of home not a qualified home. H&r block com    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. H&r block com See Divided use of your home under Qualified Home in Part I. H&r block com 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. H&r block com 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. H&r block com 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. H&r block com Example. H&r block com You bought your home for cash 10 years ago. H&r block com 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. H&r block com This loan is home equity debt. H&r block com Home equity debt limit. H&r block com   There is a limit on the amount of debt that can be treated as home equity debt. H&r block com 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. H&r block com 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. H&r block com Example. H&r block com You own one home that you bought in 2000. H&r block com Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. H&r block com Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. H&r block com To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. H&r block com Your home equity debt is limited to $15,000. H&r block com 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. H&r block com Debt higher than limit. H&r block com   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. H&r block com But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. H&r block com If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. H&r block com Part of home not a qualified home. H&r block com   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. H&r block com See Divided use of your home under Qualified Home in Part I. H&r block com Fair market value (FMV). H&r block com    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. H&r block com 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. H&r block com 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. H&r block com To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. H&r block com How you used the proceeds does not matter. H&r block com Grandfathered debt is not limited. H&r block com All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. H&r block com 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. H&r block com Refinanced grandfathered debt. H&r block com   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. H&r block com 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). H&r block com The debt must be secured by the qualified home. H&r block com   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. H&r block com After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. H&r block com Exception. H&r block com   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. H&r block com This term cannot be more than 30 years. H&r block com Example. H&r block com Chester took out a $200,000 first mortgage on his home in 1986. H&r block com The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. H&r block com Chester refinanced the debt in 1991 with a new 20-year mortgage. H&r block com The refinanced debt is treated as grandfathered debt for its entire term (20 years). H&r block com Line-of-credit mortgage. H&r block com    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. H&r block com The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. H&r block com The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. H&r block com See Average Mortgage Balance in the Table 1 Instructions that follow. H&r block com 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. H&r block com All the mortgages are grandfathered debt. H&r block com The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . H&r block com In either of those cases, you do not need Table 1. H&r block com Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. H&r block com Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. H&r block com Table 1. H&r block com Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. H&r block com Part I Qualified Loan Limit 1. H&r block com Enter the average balance of all your grandfathered debt. H&r block com See line 1 instructions 1. H&r block com   2. H&r block com Enter the average balance of all your home acquisition debt. H&r block com See line 2 instructions 2. H&r block com   3. H&r block com Enter $1,000,000 ($500,000 if married filing separately) 3. H&r block com   4. H&r block com Enter the larger of the amount on line 1 or the amount on line 3 4. H&r block com   5. H&r block com Add the amounts on lines 1 and 2. H&r block com Enter the total here 5. H&r block com   6. H&r block com Enter the smaller of the amount on line 4 or the amount on line 5 6. H&r block com   7. H&r block com If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. H&r block com See the line 7 instructions for the limit which may apply to you. H&r block com 7. H&r block com   8. H&r block com Add the amounts on lines 6 and 7. H&r block com Enter the total. H&r block com This is your qualified loan limit. H&r block com 8. H&r block com   Part II Deductible Home Mortgage Interest 9. H&r block com Enter the total of the average balances of all mortgages on all qualified homes. H&r block com  See line 9 instructions 9. H&r block com     If line 8 is less than line 9, go on to line 10. H&r block com If line 8 is equal to or more than line 9, stop here. H&r block com All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). H&r block com     10. H&r block com Enter the total amount of interest that you paid. H&r block com See line 10 instructions 10. H&r block com   11. H&r block com Divide the amount on line 8 by the amount on line 9. H&r block com Enter the result as a decimal amount (rounded to three places) 11. H&r block com × . H&r block com 12. H&r block com Multiply the amount on line 10 by the decimal amount on line 11. H&r block com Enter the result. H&r block com This is your deductible home mortgage interest. H&r block com Enter this amount on Schedule A (Form 1040) 12. H&r block com   13. H&r block com Subtract the amount on line 12 from the amount on line 10. H&r block com Enter the result. H&r block com This is not home mortgage interest. H&r block com See line 13 instructions 13. H&r block com   Home equity debt only. H&r block com   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. H&r block com Enter zero on line 6 and complete the rest of Table 1. H&r block com Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. H&r block com You need these amounts to complete lines 1, 2, and 9 of Table 1. H&r block com You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. H&r block com The following are methods you can use to figure your average mortgage balances. H&r block com However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. H&r block com Average of first and last balance method. H&r block com   You can use this method if all the following apply. H&r block com You did not borrow any new amounts on the mortgage during the year. H&r block com (This does not include borrowing the original mortgage amount. H&r block com ) You did not prepay more than one month's principal during the year. H&r block com (This includes prepayment by refinancing your home or by applying proceeds from its sale. H&r block com ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. H&r block com You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. H&r block com    To figure your average balance, complete the following worksheet. H&r block com    1. H&r block com 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. H&r block com 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. H&r block com Add amounts on lines 1 and 2   4. H&r block com Divide the amount on line 3 by 2. H&r block com Enter the result   Interest paid divided by interest rate method. H&r block com   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. H&r block com    Complete the following worksheet to figure your average balance. H&r block com    1. H&r block com Enter the interest paid in 2013. H&r block com Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. H&r block com However, do include interest that is for 2013 but was paid in an earlier year   2. H&r block com Enter the annual interest rate on the mortgage. H&r block com If the interest rate varied in 2013, use the lowest rate for the year   3. H&r block com Divide the amount on line 1 by the amount on line 2. H&r block com Enter the result   Example. H&r block com Mr. H&r block com Blue had a line of credit secured by his main home all year. H&r block com He paid interest of $2,500 on this loan. H&r block com The interest rate on the loan was 9% (. H&r block com 09) all year. H&r block com His average balance using this method is $27,778, figured as follows. H&r block com 1. H&r block com Enter the interest paid in 2013. H&r block com Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. H&r block com However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. H&r block com Enter the annual interest rate on the mortgage. H&r block com If the interest rate varied in 2013, use the lowest rate for the year . H&r block com 09 3. H&r block com Divide the amount on line 1 by the amount on line 2. H&r block com Enter the result $27,778 Statements provided by your lender. H&r block com   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. H&r block com You can treat the balance as zero for any month the mortgage was not secured by your qualified home. H&r block com   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. H&r block com   If your lender can give you your average balance for the year, you can use that amount. H&r block com Example. H&r block com Ms. H&r block com Brown had a home equity loan secured by her main home all year. H&r block com She received monthly statements showing her average balance for each month. H&r block com She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. H&r block com Mixed-use mortgages. H&r block com   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). H&r block com 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). H&r block com   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. H&r block com Do not use the methods described earlier in this section to figure the average balance of either category. H&r block com Instead, for each category, use the following method. H&r block com Figure the balance of that category of debt for each month. H&r block com 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. H&r block com 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. H&r block com Add together the monthly balances figured in (1). H&r block com Divide the result in (2) by 12. H&r block com   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. H&r block com Example 1. H&r block com In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). H&r block com 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. H&r block com 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). H&r block com Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. H&r block com During 2013, her principal payments on the second mortgage totaled $10,000. H&r block com 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. H&r block com The January and February balances were zero. H&r block com The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. H&r block com (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. H&r block com ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). H&r block com Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). H&r block com Example 2. H&r block com The facts are the same as in Example 1. H&r block com In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. H&r block com The balance of the home acquisition debt remains $180,000 for each of those months. H&r block com 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). H&r block com The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. H&r block com Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). H&r block com L