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Tax 1040nr

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

Tax 1040nr 5. Tax 1040nr   Table and Worksheets for the Self-Employed Table of Contents Community property laws. Tax 1040nr As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan. Tax 1040nr First, use either the rate table or rate worksheet to find your reduced contribution rate. Tax 1040nr Then complete the deduction worksheet to figure your deduction for contributions. Tax 1040nr The table and the worksheets in chapter 5 apply only to self-employed individuals who have only one defined contribution plan, such as a profit-sharing plan. Tax 1040nr A SEP plan is treated as a profit-sharing plan. Tax 1040nr However, do not use this worksheet for SARSEPs. Tax 1040nr Rate table for self-employed. Tax 1040nr   If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the table on the next page to find your reduced contribution rate. Tax 1040nr Otherwise, use the rate worksheet provided below. Tax 1040nr   First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Tax 1040nr Then read across to the rate under Column B. Tax 1040nr Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page. Tax 1040nr    Example. Tax 1040nr You are a sole proprietor with no employees. Tax 1040nr If your plan's contribution rate is 10% of a participant's compensation, your rate is 0. Tax 1040nr 090909. Tax 1040nr Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page. Tax 1040nr Deduction Worksheet for Self-Employed   Step 1           Enter your net profit from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 34, Schedule F (Form 1040)*; or box 14, code A**, Schedule K-1 (Form 1065)*. Tax 1040nr For information on other income included in net profit from self-employment, see the Instructions for Schedule SE, Form 1040. Tax 1040nr       *Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. Tax 1040nr       **General partners should reduce this amount by the same additional expenses subtracted from box 14, code A to determine the amount on line 1 or 2 of Schedule SE. Tax 1040nr     Step 2           Enter your deduction for self-employment tax from Form 1040, line 27             Step 3           Net earnings from self-employment. Tax 1040nr Subtract step 2 from step 1     Step 4           Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed     Step 5           Multiply step 3 by step 4     Step 6           Multiply $255,000 by your plan contribution rate (not the reduced rate)     Step 7           Enter the smaller of step 5 or step 6     Step 8           Contribution dollar limit $51,000     • If you made any elective deferrals to your self-employed plan, go to step 9. Tax 1040nr         • Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21. Tax 1040nr       Step 9           Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan during 2013. Tax 1040nr Do not enter more than $17,500     Step 10           Subtract step 9 from step 8     Step 11           Subtract step 9 from step 3       Step 12           Enter one-half of step 11     Step 13           Enter the smallest of step 7, 10, or 12     Step 14           Subtract step 13 from step 3     Step 15           Enter the smaller of step 9 or step 14       • If you made catch-up contributions, go to step 16. Tax 1040nr         • Otherwise, skip steps 16 through 18 and go to step 19. Tax 1040nr       Step 16           Subtract step 15 from step 14     Step 17           Enter your catch-up contributions (including designated Roth contributions), if any. Tax 1040nr Do not enter more than $5,500     Step 18           Enter the smaller of step 16 or step 17     Step 19           Add steps 13, 15, and 18. Tax 1040nr     Step 20           Enter the amount of designated Roth contributions included on lines 9 and 17. Tax 1040nr     Step 21           Subtract step 20 from step 19. Tax 1040nr This is your maximum deductible contribution. Tax 1040nr                 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Form 1040, line 28. Tax 1040nr   Rate worksheet for self-employed. Tax 1040nr   If your plan's contribution rate is not a whole percentage (for example, 10½%), you cannot use the Rate Table for Self-Employed. Tax 1040nr Use the following worksheet instead. Tax 1040nr Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (for example, 10½% = 0. Tax 1040nr 105)   2) Rate in line 1 plus 1 (for example, 0. Tax 1040nr 105 + 1 = 1. Tax 1040nr 105)   3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0. Tax 1040nr 105 ÷ 1. Tax 1040nr 105 = 0. Tax 1040nr 095)   Figuring your deduction. Tax 1040nr   Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed. Tax 1040nr Community property laws. Tax 1040nr   If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Tax 1040nr Enter on step 1 the total net profit you actually earned. Tax 1040nr Rate Table for Self-Employed Column A  If the plan contri- bution rate is: (shown as %) Column B  Your rate is: (shown as decimal) 1 . Tax 1040nr 009901 2 . Tax 1040nr 019608 3 . Tax 1040nr 029126 4 . Tax 1040nr 038462 5 . Tax 1040nr 047619 6 . Tax 1040nr 056604 7 . Tax 1040nr 065421 8 . Tax 1040nr 074074 9 . Tax 1040nr 082569 10 . Tax 1040nr 090909 11 . Tax 1040nr 099099 12 . Tax 1040nr 107143 13 . Tax 1040nr 115044 14 . Tax 1040nr 122807 15 . Tax 1040nr 130435 16 . Tax 1040nr 137931 17 . Tax 1040nr 145299 18 . Tax 1040nr 152542 19 . Tax 1040nr 159664 20 . Tax 1040nr 166667 21 . Tax 1040nr 173554 22 . Tax 1040nr 180328 23 . Tax 1040nr 186992 24 . Tax 1040nr 193548 25* . Tax 1040nr 200000* *The deduction for annual employer contributions (other than elective deferrals) to a SEP plan, a profit-sharing plan, or a money purchase plan cannot be more than 20% of your net earnings (figured without deducting contributions for yourself) from the business that has the plan. Tax 1040nr Example. Tax 1040nr You are a sole proprietor with no employees. Tax 1040nr The terms of your plan provide that you contribute 8½% (. Tax 1040nr 085) of your compensation to your plan. Tax 1040nr Your net profit from line 31, Schedule C (Form 1040) is $200,000. Tax 1040nr You have no elective deferrals or catch-up contributions. Tax 1040nr Your self-employment tax deduction on line 27 of Form 1040 is $9,728. Tax 1040nr See the filled-in portions of both Schedule SE (Form 1040), Self-Employment Income, and Form 1040, later. Tax 1040nr You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows. Tax 1040nr Deduction Worksheet for Self-Employed   Step 1           Enter your net profit from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 34, Schedule F (Form 1040)*; or box 14, code A**, Schedule K-1 (Form 1065)*. Tax 1040nr For information on other income included in net profit from self-employment, see the Instructions for Schedule SE, Form 1040. Tax 1040nr $200,000     *Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. Tax 1040nr       **General partners should reduce this amount by the same additional expenses subtracted from box 14, code A to determine the amount on line 1 or 2 of Schedule SE. Tax 1040nr     Step 2           Enter your deduction for self-employment tax from Form 1040, line 27 9,728           Step 3           Net earnings from self-employment. Tax 1040nr Subtract step 2 from step 1 190,272   Step 4           Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed 0. Tax 1040nr 078   Step 5           Multiply step 3 by step 4 14,841   Step 6           Multiply $255,000 by your plan contribution rate (not the reduced rate) 21,675   Step 7           Enter the smaller of step 5 or step 6 14,841   Step 8           Contribution dollar limit $51,000     • If you made any elective deferrals to your self-employed plan, go to step 9. Tax 1040nr         • Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21. Tax 1040nr       Step 9           Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan during 2013. Tax 1040nr Do not enter more than $17,500 N/A   Step 10           Subtract step 9 from step 8     Step 11           Subtract step 9 from step 3       Step 12           Enter one-half of step 11     Step 13           Enter the smallest of step 7, 10, or 12     Step 14           Subtract step 13 from step 3     Step 15           Enter the smaller of step 9 or step 14       • If you made catch-up contributions, go to step 16. Tax 1040nr         • Otherwise, skip steps 16 through 18 and go to step 19. Tax 1040nr       Step 16           Subtract step 15 from step 14     Step 17           Enter your catch-up contributions (including designated Roth contributions), if any. Tax 1040nr Do not enter more than $5,500     Step 18           Enter the smaller of step 16 or step 17     Step 19           Add steps 13, 15, and 18. Tax 1040nr     Step 20           Enter the amount of designated Roth contributions included on lines 9 and 17     Step 21           Subtract step 20 from step 19. Tax 1040nr This is your maximum deductible contribution $14,841                 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Form 1040, line 28. Tax 1040nr   See the filled-in Deduction Worksheet for Self-Employed on this page. Tax 1040nr Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (for example, 10½% = 0. Tax 1040nr 105) 0. Tax 1040nr 085 2) Rate in line 1 plus 1 (for example, 0. Tax 1040nr 105 + 1 = 1. Tax 1040nr 105) 1. Tax 1040nr 085 3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0. Tax 1040nr 105 ÷ 1. Tax 1040nr 105 = 0. Tax 1040nr 095) 0. Tax 1040nr 078 This image is too large to be displayed in the current screen. Tax 1040nr Please click the link to view the image. Tax 1040nr Portion of Form 1040 and Portion of Schedule SE Prev  Up  Next   Home   More Online Publications