Interest Paid on a Mortgage

 

 



Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.

You can deduct home mortgage interest if all the following conditions are met.

  • You file Form 1040 and itemize deductions on Schedule A (Form 1040).
  • The mortgage is a secured debt on a qualified home in which you have an ownership interest. Secured Debt and Qualified Home are explained later.

Both you and the lender must intend that the loan be repaid.

Fully deductible interest.   In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.

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. (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.) 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.

The three categories are as follows.
  1. Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
  2. 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).
  3. 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).
The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.

Secured Debt

You can deduct your home mortgage interest only if your mortgage is a secured debt. 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.

In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. In this publication, mortgage will refer to secured debt.

Debt not secured by home.   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).

A debt is not secured by your home if it once was, but is no longer secured by your home.

Wraparound mortgage.   This is not a secured debt unless it is recorded or otherwise perfected under state law.

Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

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. Otherwise, it is considered personal interest and is not deductible.

Main home.   You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home.   A second home is a home that you choose to treat as your second home.

Second home not rented out.   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. You do not have to use the home during the year.

Second home rented out.   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. 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. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.

More than one second home.   If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home during the year in the following situations.

  • 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.
  • 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.
  • 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.

There are limitations on the amount of interest you can claim.  For example, if the loan balance was over $1 million during the year, then part of the interest will be disallowed.  Further, if an equity loan of more than $100,000 is outstanding and none of the proceeds went to improving the home, then there is a limitation on the interest.

Please read http://www.irs.gov/publications/p936/ar02.html for more information on loan interest deduction including the limited deduction for points paid to secure a loan.

 

Chief Counsel Advice 201451027

In Chief Counsel Advice (CCA), IRS addresses the issue of who is entitled to claim a home mortgage interest deduction where the underlying property is owned by more than one taxpayer, and mortgage payments are made by one or both of them.

Background. In general, a deduction for interest is available only to those who are primarily liable on the underlying debt. Where, however, two or more persons are jointly and severally liable for a debt, each is primarily liable for that debt, and each is entitled to a deduction for the interest on that debt that he or she pays.

Under Code Sec. 163, a taxpayer is generally allowed a deduction (within dollar limits) for interest paid or accrued on qualified residence interest, which includes interest paid on acquisition debt with respect to any qualifying residence of the taxpayer. Under Reg. 1.163-1(b), a taxpayer may deduct, as home mortgage interest, interest he paid on a mortgage on real estate of which he is the legal or equitable owner, even though he is not directly liable on the bond or note secured by the mortgage.

Where more than one taxpayer is liable on a home mortgage obligation, questions may arise as to which taxpayer is entitled to an residence interest deduction. The new CCA addresses three such situations.

Situation 1. Taxpayers are a married couple and are jointly and severally liable on a mortgage. One spouse is deceased at the end of the tax year and the bank issues a Form 1098 (Mortgage Interest Statement) under that spouse's social security number. The surviving spouse files a separate return. Payments on the mortgage may be made from a joint account or from separate funds of either taxpayer.

Situation 2. Taxpayers are an unmarried couple and are jointly and severally liable on a mortgage. The bank either issues a Form 1098 under only one social security number, or under both. One or both taxpayers claims the mortgage interest deduction on their individual returns. Payments on the mortgage may be made from a joint account or from separate funds of either taxpayer.

Situation 3. Related persons co-own a house and are liable on a mortgage note. A bank may issue a Form 1098 under the name of one or both of the co-obligors. Each taxpayer claims 50% or 100% of the deduction. Payments on the mortgage may be made from a joint account or from separate funds of either taxpayer.

IRS analysis. After reviewing a number of cases and rulings on the subject, the CCA concludes that funds paid from a joint account with two equal owners are presumed to be paid equally by each owner, in the absence of evidence showing that that is not the case. It also says that a person who is jointly and severally liable on a home mortgage debt is entitled to deduct all the otherwise allowable interest on that debt, provided that person actually pays all the interest.

The CCA reaches back to Rev Rul 59-66, 1959-1 CB 60, to find the rule that applies where payment for a deductible amount is made from funds deposited in a joint checking account in which the husband and wife have an equal interest. In this situation, in the absence of competent evidence to the contrary, the amount is presumed to be paid equally by the husband and wife for the purpose of computing the deduction when the husband and wife file separate returns.

IRS's findings. The CCA concludes that:

  • . . . In Situation 1, in determining the amount of interest deductible on the decedent's return, the general rules regarding payment from joint or separate accounts, and joint liability should apply. For example, if the decedent paid interest from a joint account before death, his return should reflect one-half of the interest paid from the joint account before the time of death, in the absence of evidence that the interest was paid from the decedent's separate funds. In years following the year of death, the surviving spouse may claim the deduction for interest since he or she is liable on the note, assuming the surviving spouse makes the interest payments and all other requirements are met.

  • . . . In Situation 2, since both taxpayers are liable on the mortgage, both are entitled to claim the mortgage interest deduction to the extent of the mortgage interest paid by either taxpayer. If the mortgage interest is paid from separate funds, each taxpayer may claim the mortgage interest deduction paid from each one's separate funds. If the mortgage interest is paid from a joint bank account in which each has an equal interest, under Rev Rul 59-66, it would be presumed that each has paid an equal amount absent evidence to the contrary.

  • . . . In Situation 3, the CCA concludes that if co-owners of a house are both liable on a mortgage, each one may take a deduction for the amount each one pays, subject to the limitations and requirements of deducting mortgage interest under Code Sec. 163(h).


 

 

     

Revised: 12/27/14