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Military Tax Deduction

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Military Tax Deduction

Military tax deduction 6. Military tax deduction   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Military tax deduction However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Military tax deduction This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Military tax deduction This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Military tax deduction However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Military tax deduction If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Military tax deduction For more information, see chapter 2. Military tax deduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Military tax deduction These lines are reproduced below and are explained in the discussion that follows. Military tax deduction 35 Inventory at beginning of year. Military tax deduction If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Military tax deduction Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Military tax deduction Subtract line 41 from line 40. Military tax deduction  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Military tax deduction If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Military tax deduction Opening inventory usually will be identical to the closing inventory of the year before. Military tax deduction You must explain any difference in a schedule attached to your return. Military tax deduction Donation of inventory. Military tax deduction   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Military tax deduction The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Military tax deduction You must remove the amount of your contribution deduction from your opening inventory. Military tax deduction It is not part of the cost of goods sold. Military tax deduction   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Military tax deduction Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Military tax deduction For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Military tax deduction   A special rule may apply to certain donations of food inventory. Military tax deduction See Publication 526, Charitable Contributions. Military tax deduction Example 1. Military tax deduction You are a calendar year taxpayer who uses an accrual method of accounting. Military tax deduction In 2013, you contributed property from inventory to a church. Military tax deduction It had a fair market value of $600. Military tax deduction The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Military tax deduction The charitable contribution allowed for 2013 is $400 ($600 − $200). Military tax deduction The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Military tax deduction The cost of goods sold you use in determining gross income for 2013 must not include the $400. Military tax deduction You remove that amount from opening inventory for 2013. Military tax deduction Example 2. Military tax deduction If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Military tax deduction You would not be allowed any charitable contribution deduction for the contributed property. Military tax deduction Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Military tax deduction If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Military tax deduction Trade discounts. Military tax deduction   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Military tax deduction You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Military tax deduction Do not show the discount amount separately as an item in gross income. Military tax deduction   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Military tax deduction Cash discounts. Military tax deduction   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Military tax deduction There are two methods of accounting for cash discounts. Military tax deduction You can either credit them to a separate discount account or deduct them from total purchases for the year. Military tax deduction Whichever method you use, you must be consistent. Military tax deduction If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Military tax deduction For more information, see Change in Accounting Method in chapter 2. Military tax deduction   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Military tax deduction If you use this method, do not reduce your cost of goods sold by the cash discounts. Military tax deduction Purchase returns and allowances. Military tax deduction   You must deduct all returns and allowances from your total purchases during the year. Military tax deduction Merchandise withdrawn from sale. Military tax deduction   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Military tax deduction Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Military tax deduction You must also charge the amount to your drawing account. Military tax deduction   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Military tax deduction As stated above, you also use it to record withdrawals of merchandise for personal or family use. Military tax deduction This account is also known as a “withdrawals account” or “personal account. Military tax deduction ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Military tax deduction Small merchandisers (wholesalers, retailers, etc. Military tax deduction ) usually do not have labor costs that can properly be charged to cost of goods sold. Military tax deduction In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Military tax deduction Direct labor. Military tax deduction   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Military tax deduction They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Military tax deduction Indirect labor. Military tax deduction   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Military tax deduction Other labor. Military tax deduction   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Military tax deduction Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Military tax deduction Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Military tax deduction Those that are not used in the manufacturing process are treated as deferred charges. Military tax deduction You deduct them as a business expense when you use them. Military tax deduction Business expenses are discussed in chapter 8. Military tax deduction Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Military tax deduction Containers. Military tax deduction   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Military tax deduction If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Military tax deduction Freight-in. Military tax deduction   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Military tax deduction Overhead expenses. Military tax deduction   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Military tax deduction The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Military tax deduction Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Military tax deduction Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Military tax deduction Inventory at the end of the year is also known as closing or ending inventory. Military tax deduction Your ending inventory will usually become the beginning inventory of your next tax year. Military tax deduction Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Military tax deduction Prev  Up  Next   Home   More Online Publications
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The Military Tax Deduction

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