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Complete 1040x Form

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Complete 1040x Form

Complete 1040x form 23. Complete 1040x form   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Complete 1040x form Mortgage proceeds used for business or investment. Complete 1040x form Introduction This chapter discusses what interest expenses you can deduct. Complete 1040x form Interest is the amount you pay for the use of borrowed money. Complete 1040x form The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Complete 1040x form Home mortgage interest, including certain points and mortgage insurance premiums. Complete 1040x form Investment interest. Complete 1040x form This chapter explains these deductions. Complete 1040x form It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Complete 1040x form Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Complete 1040x form Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Complete 1040x form The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Complete 1040x form You can deduct home mortgage interest if all the following conditions are met. Complete 1040x form You file Form 1040 and itemize deductions on Schedule A (Form 1040). Complete 1040x form The mortgage is a secured debt on a qualified home in which you have an ownership interest. Complete 1040x form (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Complete 1040x form The term “qualified home” means your main home or second home. Complete 1040x form For details, see Publication 936. Complete 1040x form )  Both you and the lender must intend that the loan be repaid. Complete 1040x form Amount Deductible In most cases, you can deduct all of your home mortgage interest. Complete 1040x form How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Complete 1040x form Fully deductible interest. Complete 1040x form   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. Complete 1040x form (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. Complete 1040x form )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Complete 1040x form 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). Complete 1040x form 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). Complete 1040x form The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Complete 1040x form   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Complete 1040x form    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Complete 1040x form Figure 23-A. Complete 1040x form Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Complete 1040x form Figure 23-A. Complete 1040x form Is My Interest Fully Deductible? Limits on deduction. Complete 1040x form   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Complete 1040x form If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Complete 1040x form Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Complete 1040x form It also describes certain special situations that may affect your deduction. Complete 1040x form Late payment charge on mortgage payment. Complete 1040x form   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. Complete 1040x form Mortgage prepayment penalty. Complete 1040x form   If you pay off your home mortgage early, you may have to pay a penalty. Complete 1040x form 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. Complete 1040x form Sale of home. Complete 1040x form   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 sale. Complete 1040x form Example. Complete 1040x form John and Peggy Harris sold their home on May 7. Complete 1040x form Through April 30, they made home mortgage interest payments of $1,220. Complete 1040x form 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. Complete 1040x form Their mortgage interest deduction is $1,270 ($1,220 + $50). Complete 1040x form Prepaid interest. Complete 1040x form   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. Complete 1040x form You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Complete 1040x form However, there is an exception that applies to points, discussed later. Complete 1040x form Mortgage interest credit. Complete 1040x form   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. Complete 1040x form Figure the credit on Form 8396, Mortgage Interest Credit. Complete 1040x form If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Complete 1040x form   For more information on the credit, see chapter 37. Complete 1040x form Ministers' and military housing allowance. Complete 1040x form   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. Complete 1040x form Hardest Hit Fund and Emergency Homeowners' Loan Programs. Complete 1040x form   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. Complete 1040x form 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. Complete 1040x form 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. Complete 1040x form 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 (real property taxes). Complete 1040x form 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. Complete 1040x form Mortgage assistance payments under section 235 of the National Housing Act. Complete 1040x form   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. Complete 1040x form You cannot deduct the interest that is paid for you. Complete 1040x form No other effect on taxes. Complete 1040x form   Do not include these mortgage assistance payments in your income. Complete 1040x form Also, do not use these payments to reduce other deductions, such as real estate taxes. Complete 1040x form Divorced or separated individuals. Complete 1040x form   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. Complete 1040x form See the discussion of Payments for jointly-owned home in chapter 18. Complete 1040x form Redeemable ground rents. Complete 1040x form   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Complete 1040x form   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Complete 1040x form For more information, see Publication 936. Complete 1040x form Nonredeemable ground rents. Complete 1040x form   Payments on a nonredeemable ground rent are not mortgage interest. Complete 1040x form You can deduct them as rent if they are a business expense or if they are for rental property. Complete 1040x form Reverse mortgages. Complete 1040x form   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. Complete 1040x form With a reverse mortgage, you retain title to your home. Complete 1040x form 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. Complete 1040x form Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Complete 1040x form Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Complete 1040x form Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Complete 1040x form Rental payments. Complete 1040x form   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Complete 1040x form This is true even if the settlement papers call them interest. Complete 1040x form You cannot deduct these payments as home mortgage interest. Complete 1040x form Mortgage proceeds invested in tax-exempt securities. Complete 1040x form   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. Complete 1040x form “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Complete 1040x form Refunds of interest. Complete 1040x form   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. Complete 1040x form 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. Complete 1040x form However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Complete 1040x form This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Complete 1040x form    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. Complete 1040x form For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Complete 1040x form   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Complete 1040x form Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Complete 1040x form Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Complete 1040x form A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Complete 1040x form See Points paid by the seller , later. Complete 1040x form General Rule You generally cannot deduct the full amount of points in the year paid. Complete 1040x form Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Complete 1040x form See Deduction Allowed Ratably , next. Complete 1040x form For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Complete 1040x form 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. Complete 1040x form You use the cash method of accounting. Complete 1040x form This means you report income in the year you receive it and deduct expenses in the year you pay them. Complete 1040x form Most individuals use this method. Complete 1040x form Your loan is secured by a home. Complete 1040x form (The home does not need to be your main home. Complete 1040x form ) Your loan period is not more than 30 years. Complete 1040x form 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. Complete 1040x form 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. Complete 1040x form Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Complete 1040x form (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Complete 1040x form ) Your loan is secured by your main home. Complete 1040x form (Your main home is the one you ordinarily live in most of the time. Complete 1040x form ) Paying points is an established business practice in the area where the loan was made. Complete 1040x form The points paid were not more than the points generally charged in that area. Complete 1040x form You use the cash method of accounting. Complete 1040x form This means you report income in the year you receive it and deduct expenses in the year you pay them. Complete 1040x form (If you want more information about this method, see Accounting Methods in chapter 1. Complete 1040x form ) 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. Complete 1040x form The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Complete 1040x form The funds you provided are not required to have been applied to the points. Complete 1040x form They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Complete 1040x form You cannot have borrowed these funds from your lender or mortgage broker. Complete 1040x form You use your loan to buy or build your main home. Complete 1040x form The points were computed as a percentage of the principal amount of the mortgage. Complete 1040x form The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Complete 1040x form The points may be shown as paid from either your funds or the seller's. Complete 1040x form Figure 23-B. Complete 1040x form Are My Points Fully Deductible This Year? Please click here for the text description of the image. Complete 1040x form Figure 23-B. Complete 1040x form Are My Points Fully Deductible This Year? Note. Complete 1040x form 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. Complete 1040x form Home improvement loan. Complete 1040x form   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. Complete 1040x form Second home. Complete 1040x form You cannot fully deduct in the year paid points you pay on loans secured by your second home. Complete 1040x form You can deduct these points only over the life of the loan. Complete 1040x form Refinancing. Complete 1040x form   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Complete 1040x form This is true even if the new mortgage is secured by your main home. Complete 1040x form   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 , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Complete 1040x form You can deduct the rest of the points over the life of the loan. Complete 1040x form Example 1. Complete 1040x form In 1998, Bill Fields got a mortgage to buy a home. Complete 1040x form In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Complete 1040x form The mortgage is secured by his home. Complete 1040x form To get the new loan, he had to pay three points ($3,000). Complete 1040x form 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. Complete 1040x form Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Complete 1040x form The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Complete 1040x form Bill's first payment on the new loan was due July 1. Complete 1040x form He made six payments on the loan in 2013 and is a cash basis taxpayer. Complete 1040x form Bill used the funds from the new mortgage to repay his existing mortgage. Complete 1040x form 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. Complete 1040x form He cannot deduct all of the points in 2013. Complete 1040x form He can deduct two points ($2,000) ratably over the life of the loan. Complete 1040x form He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Complete 1040x form The other point ($1,000) was a fee for services and is not deductible. Complete 1040x form Example 2. Complete 1040x form 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. Complete 1040x form Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Complete 1040x form His deduction is $500 ($2,000 × 25%). Complete 1040x form Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Complete 1040x form This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Complete 1040x form The total amount Bill deducts in 2013 is $550 ($500 + $50). Complete 1040x form Special Situations This section describes certain special situations that may affect your deduction of points. Complete 1040x form Original issue discount. Complete 1040x form   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. Complete 1040x form This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Complete 1040x form Amounts charged for services. Complete 1040x form   Amounts charged by the lender for specific services connected to the loan are not interest. Complete 1040x form Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Complete 1040x form You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Complete 1040x form Points paid by the seller. Complete 1040x form   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Complete 1040x form Treatment by seller. Complete 1040x form   The seller cannot deduct these fees as interest. Complete 1040x form But they are a selling expense that reduces the amount realized by the seller. Complete 1040x form See chapter 15 for information on selling your home. Complete 1040x form Treatment by buyer. Complete 1040x form    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. Complete 1040x form If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Complete 1040x form If any of those tests are not met, the buyer deducts the points over the life of the loan. Complete 1040x form   For information about basis, see chapter 13. Complete 1040x form Funds provided are less than points. Complete 1040x form   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. Complete 1040x form In addition, you can deduct any points paid by the seller. Complete 1040x form Example 1. Complete 1040x form When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Complete 1040x form You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Complete 1040x form Of the $1,000 charged for points, you can deduct $750 in the year paid. Complete 1040x form You spread the remaining $250 over the life of the mortgage. Complete 1040x form Example 2. Complete 1040x form 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. Complete 1040x form In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Complete 1040x form You spread the remaining $250 over the life of the mortgage. Complete 1040x form You must reduce the basis of your home by the $1,000 paid by the seller. Complete 1040x form Excess points. Complete 1040x form   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. Complete 1040x form You must spread any additional points over the life of the mortgage. Complete 1040x form Mortgage ending early. Complete 1040x form   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. Complete 1040x form However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Complete 1040x form Instead, deduct the remaining balance over the term of the new loan. Complete 1040x form    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Complete 1040x form Example. Complete 1040x form Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Complete 1040x form He deducts $200 points per year. Complete 1040x form Through 2012, Dan has deducted $2,200 of the points. Complete 1040x form Dan prepaid his mortgage in full in 2013. Complete 1040x form He can deduct the remaining $800 of points in 2013. Complete 1040x form Limits on deduction. Complete 1040x form   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Complete 1040x form See Publication 936 for details. Complete 1040x form Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Complete 1040x form The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Complete 1040x form Qualified mortgage insurance. Complete 1040x form   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). Complete 1040x form   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Complete 1040x form If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Complete 1040x form These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Complete 1040x form Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Complete 1040x form Special rules for prepaid mortgage insurance. Complete 1040x form   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Complete 1040x form 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. Complete 1040x form No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Complete 1040x form This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Complete 1040x form See the Example below. Complete 1040x form Example. Complete 1040x form Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Complete 1040x form Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Complete 1040x form 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. Complete 1040x form Ryan's adjusted gross income (AGI) for 2012 is $76,000. Complete 1040x form Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Complete 1040x form For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Complete 1040x form 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). Complete 1040x form Limit on deduction. Complete 1040x form   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. Complete 1040x form 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. Complete 1040x form If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Complete 1040x form 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. Complete 1040x form You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Complete 1040x form A governmental unit is a person for purposes of furnishing the statement. Complete 1040x form The statement for each year should be sent to you by January 31 of the following year. Complete 1040x form A copy of this form will also be sent to the IRS. Complete 1040x form 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. Complete 1040x form However, it should not show any interest that was paid for you by a government agency. Complete 1040x form As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Complete 1040x form However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Complete 1040x form See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Complete 1040x form Prepaid interest on Form 1098. Complete 1040x form   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. Complete 1040x form However, you cannot deduct the prepaid amount for January 2014 in 2013. Complete 1040x form (See Prepaid interest , earlier. Complete 1040x form ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Complete 1040x form You will include the interest for January 2014 with the other interest you pay for 2014. Complete 1040x form See How To Report , later. Complete 1040x form Refunded interest. Complete 1040x form   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. Complete 1040x form See Refunds of interest , earlier. Complete 1040x form Mortgage insurance premiums. Complete 1040x form   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Complete 1040x form See Mortgage Insurance Premiums, earlier. Complete 1040x form Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Complete 1040x form If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Complete 1040x form You can deduct investment interest subject to the limit discussed later. Complete 1040x form However, you cannot deduct interest you incurred to produce tax-exempt income. Complete 1040x form Nor can you deduct interest expenses on straddles. Complete 1040x form Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Complete 1040x form Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Complete 1040x form It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Complete 1040x form Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Complete 1040x form Partners, shareholders, and beneficiaries. Complete 1040x form   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Complete 1040x form Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Complete 1040x form Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Complete 1040x form The allocation is not affected by the use of property that secures the debt. Complete 1040x form Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Complete 1040x form You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Complete 1040x form The interest carried over is treated as investment interest paid or accrued in that next year. Complete 1040x form You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Complete 1040x form Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Complete 1040x form Investment income. Complete 1040x form    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Complete 1040x form Investment income does not include Alaska Permanent Fund dividends. Complete 1040x form It also does not include qualified dividends or net capital gain unless you choose to include them. Complete 1040x form Choosing to include qualified dividends. Complete 1040x form   Investment income generally does not include qualified dividends, discussed in chapter 8. Complete 1040x form However, you can choose to include all or part of your qualified dividends in investment income. Complete 1040x form   You make this choice by completing Form 4952, line 4g, according to its instructions. Complete 1040x form   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Complete 1040x form Choosing to include net capital gain. Complete 1040x form   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Complete 1040x form However, you can choose to include all or part of your net capital gain in investment income. Complete 1040x form    You make this choice by completing Form 4952, line 4g, according to its instructions. Complete 1040x form   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Complete 1040x form    Before making either choice, consider the overall effect on your tax liability. Complete 1040x form Compare your tax if you make one or both of these choices with your tax if you do not. Complete 1040x form Investment income of child reported on parent's return. Complete 1040x form    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Complete 1040x form If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Complete 1040x form Child's qualified dividends. Complete 1040x form   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Complete 1040x form However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Complete 1040x form   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Complete 1040x form Child's Alaska Permanent Fund dividends. Complete 1040x form   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Complete 1040x form To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Complete 1040x form Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Complete 1040x form Subtract the result from the amount on Form 8814, line 12. Complete 1040x form Child's capital gain distributions. Complete 1040x form    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Complete 1040x form However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Complete 1040x form   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Complete 1040x form Investment expenses. Complete 1040x form   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Complete 1040x form Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Complete 1040x form Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Complete 1040x form Losses from passive activities. Complete 1040x form   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Complete 1040x form See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Complete 1040x form Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Complete 1040x form Exception to use of Form 4952. Complete 1040x form   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Complete 1040x form Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Complete 1040x form You do not have any other deductible investment expenses. Complete 1040x form You have no carryover of investment interest expense from 2012. Complete 1040x form If you meet all of these tests, you can deduct all of your investment interest. Complete 1040x form More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Complete 1040x form Items You Cannot Deduct Some interest payments are not deductible. Complete 1040x form Certain expenses similar to interest also are not deductible. Complete 1040x form Nondeductible expenses include the following items. Complete 1040x form Personal interest (discussed later). Complete 1040x form Service charges (however, see Other Expenses (Line 23) in chapter 28). Complete 1040x form Annual fees for credit cards. Complete 1040x form Loan fees. Complete 1040x form Credit investigation fees. Complete 1040x form Interest to purchase or carry tax-exempt securities. Complete 1040x form Penalties. Complete 1040x form   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Complete 1040x form Personal Interest Personal interest is not deductible. Complete 1040x form Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Complete 1040x form It includes the following items. Complete 1040x form Interest on car loans (unless you use the car for business). Complete 1040x form Interest on federal, state, or local income tax. Complete 1040x form Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Complete 1040x form Late payment charges by a public utility. Complete 1040x form You may be able to deduct interest you pay on a qualified student loan. Complete 1040x form For details, see Publication 970, Tax Benefits for Education. Complete 1040x form Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Complete 1040x form However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Complete 1040x form You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Complete 1040x form You do this by tracing disbursements of the debt proceeds to specific uses. Complete 1040x form For details on how to do this, see chapter 4 of Publication 535. Complete 1040x form How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Complete 1040x form Where you deduct your interest expense generally depends on how you use the loan proceeds. Complete 1040x form See Table 23-1 for a summary of where to deduct your interest expense. Complete 1040x form Home mortgage interest and points. Complete 1040x form   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Complete 1040x form 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. Complete 1040x form Attach a statement explaining the difference and print “See attached” next to line 10. Complete 1040x form    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Complete 1040x form 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. Complete 1040x form The seller must give you this number and you must give the seller your TIN. Complete 1040x form A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Complete 1040x form Failure to meet any of these requirements may result in a $50 penalty for each failure. Complete 1040x form 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. Complete 1040x form See Social Security Number (SSN) in chapter 1 for more information about TINs. Complete 1040x form    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. Complete 1040x form   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Complete 1040x form More than one borrower. Complete 1040x form   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. Complete 1040x form Show how much of the interest each of you paid, and give the name and address of the person who received the form. Complete 1040x form Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Complete 1040x form Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Complete 1040x form   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. Complete 1040x form You should let each of the other borrowers know what his or her share is. Complete 1040x form Mortgage proceeds used for business or investment. Complete 1040x form    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Complete 1040x form It shows where to deduct the part of your excess interest that is for those activities. Complete 1040x form Investment interest. Complete 1040x form    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Complete 1040x form Amortization of bond premium. Complete 1040x form   There are various ways to treat the premium you pay to buy taxable bonds. Complete 1040x form See Bond Premium Amortization in Publication 550. Complete 1040x form Income-producing rental or royalty interest. Complete 1040x form   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Complete 1040x form Example. Complete 1040x form You rent out part of your home and borrow money to make repairs. Complete 1040x form You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Complete 1040x form Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Complete 1040x form Table 23-1. Complete 1040x form Where To Deduct Your Interest Expense IF you have . Complete 1040x form . Complete 1040x form . Complete 1040x form THEN deduct it on . Complete 1040x form . Complete 1040x form . Complete 1040x form AND for more information go to . Complete 1040x form . Complete 1040x form . Complete 1040x form deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Complete 1040x form deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Complete 1040x form deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Complete 1040x form deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Complete 1040x form deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Complete 1040x form deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Complete 1040x form deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Complete 1040x form deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Complete 1040x form deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Complete 1040x form personal interest not deductible. Complete 1040x form Prev  Up  Next   Home   More Online Publications
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Letter 2272C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is a response to your oral or written request to pay your balance due in installments. It explains why the IRS cannot establish the agreement.

What do I have to do?

Provide the IRS the requested information or provide an explanation on why you cannot.

How much time do I have?

The letter provides you a specific amount of time you have to gather the requested information and return it to us. However, responding quickly will resolve your account issue sooner.

What happens if I don't take any action?

The law allows IRS to proceed with enforcement action which could result in a levy on your bank account or wages, or liens on personal property.

Who should I contact?

The letter provides a specific contact telephone number. The person who answers the phone will assist you.

What if I don't agree or have already taken corrective action?

If your Installment Agreement is rejected, the letter will provide you information on how to Appeal the Rejection. If you have provided the information we requested within the last 45 days, you may want to call the number on the letter to verify your case is being re-considered.

Page Last Reviewed or Updated: 30-Jan-2014

The Complete 1040x Form

Complete 1040x form 4. Complete 1040x form   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Complete 1040x form Payments from checking accounts. Complete 1040x form Amounts paid within 30 days. Complete 1040x form Optional method for determining date of reallocation. Complete 1040x form Interest on a segregated account. Complete 1040x form How to report. Complete 1040x form Interest You Can DeductStatement. Complete 1040x form Expenses paid to obtain a mortgage. Complete 1040x form Prepayment penalty. Complete 1040x form De minimis OID. Complete 1040x form Constant-yield method. Complete 1040x form Loan or mortgage ends. Complete 1040x form Interest You Cannot DeductPenalties. Complete 1040x form Who is a key person? Exceptions for pre-June 1997 contracts. Complete 1040x form Interest allocated to unborrowed policy cash value. Complete 1040x form Capitalization of Interest When To Deduct InterestPrepaid interest. Complete 1040x form Discounted loan. Complete 1040x form Refunds of interest. Complete 1040x form Prepaid interest. Complete 1040x form Discounted loan. Complete 1040x form Tax deficiency. Complete 1040x form Related person. Complete 1040x form Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Complete 1040x form Introduction This chapter discusses the tax treatment of business interest expense. Complete 1040x form Business interest expense is an amount charged for the use of money you borrowed for business activities. Complete 1040x form Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Complete 1040x form Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Complete 1040x form 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Complete 1040x form Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Complete 1040x form If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Complete 1040x form Allocate your interest expense to the following categories. Complete 1040x form Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Complete 1040x form You allocate loan proceeds by tracing disbursements to specific uses. Complete 1040x form The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Complete 1040x form Secured loan. Complete 1040x form   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Complete 1040x form Example. Complete 1040x form You secure a loan with property used in your business. Complete 1040x form You use the loan proceeds to buy an automobile for personal use. Complete 1040x form You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Complete 1040x form    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Complete 1040x form The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Complete 1040x form For more information, see Publication 936. Complete 1040x form Allocation period. Complete 1040x form   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Complete 1040x form The date the loan is repaid. Complete 1040x form The date the loan is reallocated to another use. Complete 1040x form Proceeds not disbursed to borrower. Complete 1040x form   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Complete 1040x form This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Complete 1040x form Proceeds deposited in borrower's account. Complete 1040x form   Treat loan proceeds deposited in an account as property held for investment. Complete 1040x form It does not matter whether the account pays interest. Complete 1040x form Any interest you pay on the loan is investment interest expense. Complete 1040x form If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Complete 1040x form Example. Complete 1040x form Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Complete 1040x form No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Complete 1040x form On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Complete 1040x form On September 4, Celina uses an additional $40,000 from the account for personal purposes. Complete 1040x form Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Complete 1040x form From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Complete 1040x form From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Complete 1040x form Order of funds spent. Complete 1040x form   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Complete 1040x form Any unborrowed amounts held in the same account. Complete 1040x form Any amounts deposited after these loan proceeds. Complete 1040x form Example. Complete 1040x form On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Complete 1040x form The following table shows the transactions in her account during the tax year. Complete 1040x form Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Complete 1040x form She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Complete 1040x form She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Complete 1040x form She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Complete 1040x form For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Complete 1040x form Payments from checking accounts. Complete 1040x form   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Complete 1040x form You can treat checks written on the same day as written in any order. Complete 1040x form Amounts paid within 30 days. Complete 1040x form   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Complete 1040x form This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Complete 1040x form   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Complete 1040x form If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Complete 1040x form   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Complete 1040x form Example. Complete 1040x form Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Complete 1040x form Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Complete 1040x form Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Complete 1040x form Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Complete 1040x form In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Complete 1040x form Optional method for determining date of reallocation. Complete 1040x form   You can use the following method to determine the date loan proceeds are reallocated to another use. Complete 1040x form You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Complete 1040x form The first day of that month. Complete 1040x form The date the loan proceeds are deposited in the account. Complete 1040x form However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Complete 1040x form Interest on a segregated account. Complete 1040x form   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Complete 1040x form When the interest earned is used up, any remaining payments are from loan proceeds. Complete 1040x form Example. Complete 1040x form You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Complete 1040x form When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Complete 1040x form You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Complete 1040x form All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Complete 1040x form The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Complete 1040x form The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Complete 1040x form Loan repayment. Complete 1040x form   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Complete 1040x form Personal use. Complete 1040x form Investments and passive activities (other than those included in (3)). Complete 1040x form Passive activities in connection with a rental real estate activity in which you actively participate. Complete 1040x form Former passive activities. Complete 1040x form Trade or business use and expenses for certain low-income housing projects. Complete 1040x form Line of credit (continuous borrowings). Complete 1040x form   The following rules apply if you have a line of credit or similar arrangement. Complete 1040x form Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Complete 1040x form Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Complete 1040x form Treat these loans as repaid in the order shown on the loan agreement. Complete 1040x form Loan refinancing. Complete 1040x form   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Complete 1040x form Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Complete 1040x form Debt-financed distribution. Complete 1040x form   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Complete 1040x form The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Complete 1040x form How to report. Complete 1040x form   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Complete 1040x form If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Complete 1040x form If the proceeds were used in an investment activity, enter the interest on Form 4952. Complete 1040x form If the proceeds are used for personal purposes, the interest is generally not deductible. Complete 1040x form Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Complete 1040x form Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Complete 1040x form It does not matter what type of property secures the loan. Complete 1040x form You can deduct interest on a debt only if you meet all the following requirements. Complete 1040x form You are legally liable for that debt. Complete 1040x form Both you and the lender intend that the debt be repaid. Complete 1040x form You and the lender have a true debtor-creditor relationship. Complete 1040x form Partial liability. Complete 1040x form   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Complete 1040x form Example. Complete 1040x form You and your brother borrow money. Complete 1040x form You are liable for 50% of the note. Complete 1040x form You use your half of the loan in your business, and you make one-half of the loan payments. Complete 1040x form You can deduct your half of the total interest payments as a business deduction. Complete 1040x form Mortgage. Complete 1040x form   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Complete 1040x form However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Complete 1040x form Statement. Complete 1040x form   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Complete 1040x form You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Complete 1040x form A governmental unit is a person for purposes of furnishing the statement. Complete 1040x form   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Complete 1040x form You cannot deduct this amount. Complete 1040x form For information on how to report this refund, see Refunds of interest, later in this chapter. Complete 1040x form Expenses paid to obtain a mortgage. Complete 1040x form   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Complete 1040x form These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Complete 1040x form If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Complete 1040x form Prepayment penalty. Complete 1040x form   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Complete 1040x form Interest on employment tax deficiency. Complete 1040x form   Interest charged on employment taxes assessed on your business is deductible. Complete 1040x form Original issue discount (OID). Complete 1040x form   OID is a form of interest. Complete 1040x form A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Complete 1040x form The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Complete 1040x form   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Complete 1040x form Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Complete 1040x form You generally deduct OID over the term of the loan. Complete 1040x form Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Complete 1040x form De minimis OID. Complete 1040x form   The OID is de minimis if it is less than one-fourth of 1% (. Complete 1040x form 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Complete 1040x form   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Complete 1040x form On a constant-yield basis over the term of the loan. Complete 1040x form On a straight-line basis over the term of the loan. Complete 1040x form In proportion to stated interest payments. Complete 1040x form In its entirety at maturity of the loan. Complete 1040x form You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Complete 1040x form Example. Complete 1040x form On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Complete 1040x form The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Complete 1040x form Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Complete 1040x form The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Complete 1040x form 0025 × 10). Complete 1040x form You choose to deduct the OID on a straight-line basis over the term of the loan. Complete 1040x form Beginning in 2013, you can deduct $150 each year for 10 years. Complete 1040x form Constant-yield method. Complete 1040x form   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Complete 1040x form You figure your deduction for the first year using the following steps. Complete 1040x form Determine the issue price of the loan. Complete 1040x form Generally, this equals the proceeds of the loan. Complete 1040x form If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Complete 1040x form Multiply the result in (1) by the yield to maturity. Complete 1040x form Subtract any qualified stated interest payments from the result in (2). Complete 1040x form This is the OID you can deduct in the first year. Complete 1040x form   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Complete 1040x form To get the adjusted issue price, add to the issue price any OID previously deducted. Complete 1040x form Then follow steps (2) and (3) above. Complete 1040x form   The yield to maturity is generally shown in the literature you receive from your lender. Complete 1040x form If you do not have this information, consult your lender or tax advisor. Complete 1040x form In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Complete 1040x form Example. Complete 1040x form The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Complete 1040x form The yield to maturity on your loan is 10. Complete 1040x form 2467%, compounded annually. Complete 1040x form For 2013, you can deduct $93 [($98,500 × . Complete 1040x form 102467) − $10,000]. Complete 1040x form For 2014, you can deduct $103 [($98,593 × . Complete 1040x form 102467) − $10,000]. Complete 1040x form Loan or mortgage ends. Complete 1040x form   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Complete 1040x form A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Complete 1040x form If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Complete 1040x form See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Complete 1040x form Points. Complete 1040x form   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Complete 1040x form These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Complete 1040x form If any of these charges (points) are solely for the use of money, they are interest. Complete 1040x form   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Complete 1040x form However, you can choose to fully deduct points in the year paid if you meet certain tests. Complete 1040x form For exceptions to the general rule, see Publication 936. Complete 1040x form The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Complete 1040x form Partial payments on a nontax debt. Complete 1040x form   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Complete 1040x form You can deduct only the interest. Complete 1040x form This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Complete 1040x form Installment purchase. Complete 1040x form   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Complete 1040x form If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Complete 1040x form The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Complete 1040x form For more information on installment sales and unstated interest, see Publication 537. Complete 1040x form Interest You Cannot Deduct Certain interest payments cannot be deducted. Complete 1040x form In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Complete 1040x form You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Complete 1040x form Interest paid with funds borrowed from original lender. Complete 1040x form   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Complete 1040x form You can deduct the interest expense once you start making payments on the new loan. Complete 1040x form   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Complete 1040x form All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Complete 1040x form Capitalized interest. Complete 1040x form   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Complete 1040x form See Capitalization of Interest, later. Complete 1040x form In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Complete 1040x form Add this interest to the basis of the property. Complete 1040x form Commitment fees or standby charges. Complete 1040x form   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Complete 1040x form You may be able to deduct them as business expenses. Complete 1040x form   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Complete 1040x form See Capitalization of Interest, later. Complete 1040x form Interest on income tax. Complete 1040x form   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Complete 1040x form Treat this interest as a business deduction only in figuring a net operating loss deduction. Complete 1040x form Penalties. Complete 1040x form   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Complete 1040x form You cannot deduct them. Complete 1040x form Generally, you cannot deduct any fines or penalties. Complete 1040x form Interest on loans with respect to life insurance policies. Complete 1040x form   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Complete 1040x form   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Complete 1040x form However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Complete 1040x form Who is a key person?   A key person is an officer or 20% owner. Complete 1040x form However, the number of individuals you can treat as key persons is limited to the greater of the following. Complete 1040x form Five individuals. Complete 1040x form The lesser of 5% of the total officers and employees of the company or 20 individuals. Complete 1040x form Exceptions for pre-June 1997 contracts. Complete 1040x form   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Complete 1040x form If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Complete 1040x form Interest allocated to unborrowed policy cash value. Complete 1040x form   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Complete 1040x form This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Complete 1040x form For more information, see section 264(f) of the Internal Revenue Code. Complete 1040x form Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Complete 1040x form The property must be produced by you for use in your trade or business or for sale to customers. Complete 1040x form You cannot capitalize interest related to property that you acquire in any other manner. Complete 1040x form Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Complete 1040x form Designated property is any of the following. Complete 1040x form Real property. Complete 1040x form Tangible personal property with a class life of 20 years or more. Complete 1040x form Tangible personal property with an estimated production period of more than 2 years. Complete 1040x form Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Complete 1040x form Property you produce. Complete 1040x form   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Complete 1040x form Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Complete 1040x form Carrying charges. Complete 1040x form   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Complete 1040x form You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Complete 1040x form For more information, see chapter 7. Complete 1040x form Capitalized interest. Complete 1040x form   Treat capitalized interest as a cost of the property produced. Complete 1040x form You recover your interest when you sell or use the property. Complete 1040x form If the property is inventory, recover capitalized interest through cost of goods sold. Complete 1040x form If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Complete 1040x form Partnerships and S corporations. Complete 1040x form   The interest capitalization rules are applied first at the partnership or S corporation level. Complete 1040x form The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Complete 1040x form   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Complete 1040x form You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Complete 1040x form To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Complete 1040x form Additional information. Complete 1040x form   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Complete 1040x form For more information, see sections 1. Complete 1040x form 263A-8 through 1. Complete 1040x form 263A-15 of the regulations and Notice 88-99. Complete 1040x form Notice 88-99 is in Cumulative Bulletin 1988-2. Complete 1040x form When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Complete 1040x form Cash method. Complete 1040x form   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Complete 1040x form You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Complete 1040x form Prepaid interest. Complete 1040x form   You generally cannot deduct any interest paid before the year it is due. Complete 1040x form Interest paid in advance can be deducted only in the tax year in which it is due. Complete 1040x form Discounted loan. Complete 1040x form   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Complete 1040x form For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Complete 1040x form Refunds of interest. Complete 1040x form   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Complete 1040x form If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Complete 1040x form Accrual method. Complete 1040x form   Under an accrual method, you can deduct only interest that has accrued during the tax year. Complete 1040x form Prepaid interest. Complete 1040x form   See Prepaid interest, earlier. Complete 1040x form Discounted loan. Complete 1040x form   See Discounted loan, earlier. Complete 1040x form Tax deficiency. Complete 1040x form   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Complete 1040x form If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Complete 1040x form   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Complete 1040x form Related person. Complete 1040x form   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Complete 1040x form The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Complete 1040x form See section 267 of the Internal Revenue Code for more information. Complete 1040x form Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Complete 1040x form See Treatment of gift and demand loans, later, in this discussion. Complete 1040x form A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Complete 1040x form A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Complete 1040x form A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Complete 1040x form An additional payment in an amount equal to the forgone interest. Complete 1040x form The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Complete 1040x form Forgone interest. Complete 1040x form   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Complete 1040x form Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Complete 1040x form Internal Revenue Bulletins are available on the IRS web site at www. Complete 1040x form irs. Complete 1040x form gov/irb. Complete 1040x form You can also contact an IRS office to get these rates. Complete 1040x form Loans subject to the rules. Complete 1040x form   The rules for below-market loans apply to the following. Complete 1040x form Gift loans (below-market loans where the forgone interest is in the nature of a gift). Complete 1040x form Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Complete 1040x form Corporation-shareholder loans. Complete 1040x form Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Complete 1040x form Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Complete 1040x form   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Complete 1040x form Treatment of gift and demand loans. Complete 1040x form   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Complete 1040x form ) equal to the forgone interest on the loan. Complete 1040x form You are then treated as transferring this amount back to the lender as interest. Complete 1040x form These transfers are considered to occur annually, generally on December 31. Complete 1040x form If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Complete 1040x form The lender must report it as interest income. Complete 1040x form Limit on forgone interest for gift loans of $100,000 or less. Complete 1040x form   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Complete 1040x form This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Complete 1040x form If the borrower's net investment income is $1,000 or less, it is treated as zero. Complete 1040x form This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Complete 1040x form Treatment of term loans. Complete 1040x form   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Complete 1040x form ) on the date the loan is made. Complete 1040x form This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Complete 1040x form The same amount is treated as original issue discount on the loan. Complete 1040x form See Original issue discount (OID) under Interest You Can Deduct, earlier. Complete 1040x form Exceptions for loans of $10,000 or less. Complete 1040x form   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Complete 1040x form This exception applies only to the following. Complete 1040x form Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Complete 1040x form Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Complete 1040x form This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Complete 1040x form Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Complete 1040x form Exceptions for loans without significant tax effect. Complete 1040x form   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Complete 1040x form Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Complete 1040x form Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Complete 1040x form Certain employee-relocation loans. Complete 1040x form Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Complete 1040x form S. Complete 1040x form trade or business and not exempt from U. Complete 1040x form S. Complete 1040x form tax under an income tax treaty. Complete 1040x form Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Complete 1040x form Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Complete 1040x form Consider all the following factors. Complete 1040x form Whether items of income and deduction generated by the loan offset each other. Complete 1040x form The amount of the items. Complete 1040x form The cost of complying with the below-market loan provisions if they were to apply. Complete 1040x form Any reasons, other than taxes, for structuring the transaction as a below-market loan. Complete 1040x form Exception for loans to qualified continuing care facilities. Complete 1040x form   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Complete 1040x form A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Complete 1040x form Designed to provide services under continuing care contracts (defined below). Complete 1040x form Includes an independent living unit, and either an assisted living or nursing facility, or both. Complete 1040x form Substantially all of the independent living unit residents are covered by continuing care contracts. Complete 1040x form A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Complete 1040x form The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Complete 1040x form The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Complete 1040x form The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Complete 1040x form For more information, see section 7872(h) of the Internal Revenue Code. Complete 1040x form Sale or exchange of property. Complete 1040x form   Different rules generally apply to a loan connected with the sale or exchange of property. Complete 1040x form If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Complete 1040x form However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Complete 1040x form See Unstated Interest and Original Issue Discount (OID) in Publication 537. Complete 1040x form More information. Complete 1040x form   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Complete 1040x form 7872-5 of the regulations. Complete 1040x form Prev  Up  Next   Home   More Online Publications