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Free 1040

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Free 1040

Free 1040 3. Free 1040   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. Free 1040 Leveraged leases. Free 1040 Leveraged leases of limited-use property. Free 1040 Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. Free 1040 It also discusses how to treat other kinds of payments you make that are related to your use of this property. Free 1040 These include payments you make for taxes on the property. Free 1040 Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. Free 1040 In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. Free 1040 If you have or will receive equity in or title to the property, the rent is not deductible. Free 1040 Unreasonable rent. Free 1040   You cannot take a rental deduction for unreasonable rent. Free 1040 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Free 1040 Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Free 1040 Rent is not unreasonable just because it is figured as a percentage of gross sales. Free 1040 For examples of related persons, see Related persons in chapter 2, Publication 544. Free 1040 Rent on your home. Free 1040   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Free 1040 You must meet the requirements for business use of your home. Free 1040 For more information, see Business use of your home in chapter 1. Free 1040 Rent paid in advance. Free 1040   Generally, rent paid in your trade or business is deductible in the year paid or accrued. Free 1040 If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Free 1040 You can deduct the rest of your payment only over the period to which it applies. Free 1040 Example 1. Free 1040 You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. Free 1040 Your rent is $12,000 per year. Free 1040 You paid the first year's rent ($12,000) on June 30. Free 1040 You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. Free 1040 Example 2. Free 1040 You are a calendar year taxpayer. Free 1040 Last January you leased property for 3 years for $6,000 a year. Free 1040 You paid the full $18,000 (3 × $6,000) during the first year of the lease. Free 1040 Each year you can deduct only $6,000, the part of the lease that applies to that year. Free 1040 Canceling a lease. Free 1040   You generally can deduct as rent an amount you pay to cancel a business lease. Free 1040 Lease or purchase. Free 1040   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. Free 1040 You must first determine whether your agreement is a lease or a conditional sales contract. Free 1040 Payments made under a conditional sales contract are not deductible as rent expense. Free 1040 Conditional sales contract. Free 1040   Whether an agreement is a conditional sales contract depends on the intent of the parties. Free 1040 Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Free 1040 No single test, or special combination of tests, always applies. Free 1040 However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Free 1040 The agreement applies part of each payment toward an equity interest you will receive. Free 1040 You get title to the property after you make a stated amount of required payments. Free 1040 The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Free 1040 You pay much more than the current fair rental value of the property. Free 1040 You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Free 1040 Determine this value when you make the agreement. Free 1040 You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Free 1040 The agreement designates part of the payments as interest, or that part is easy to recognize as interest. Free 1040 Leveraged leases. Free 1040   Leveraged lease transactions may not be considered leases. Free 1040 Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. Free 1040 Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. Free 1040   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. Free 1040 Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. Free 1040 Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. Free 1040 Internal Revenue Bulletin 2001-19 is available at www. Free 1040 irs. Free 1040 gov/pub/irs-irbs/irb01-19. Free 1040 pdf. Free 1040   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. Free 1040 The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. Free 1040 The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. Free 1040 The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. Free 1040 The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. Free 1040 The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. Free 1040   The IRS may charge you a user fee for issuing a tax ruling. Free 1040 For more information, see Revenue Procedure 2014-1 available at  www. Free 1040 irs. Free 1040 gov/irb/2014-1_IRB/ar05. Free 1040 html. Free 1040 Leveraged leases of limited-use property. Free 1040   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. Free 1040 Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. Free 1040 See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. Free 1040 Leases over $250,000. Free 1040   Special rules are provided for certain leases of tangible property. Free 1040 The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. Free 1040 Rents increase during the lease. Free 1040 Rents decrease during the lease. Free 1040 Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). Free 1040 Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). Free 1040 These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). Free 1040   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. Free 1040 In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. Free 1040 For details, see section 467 of the Internal Revenue Code. Free 1040 Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. Free 1040 When you can deduct these taxes as additional rent depends on your accounting method. Free 1040 Cash method. Free 1040   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. Free 1040 Accrual method. Free 1040   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. Free 1040 That you have a liability for taxes on the leased property. Free 1040 How much the liability is. Free 1040 That economic performance occurred. Free 1040   The liability and amount of taxes are determined by state or local law and the lease agreement. Free 1040 Economic performance occurs as you use the property. Free 1040 Example 1. Free 1040 Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. Free 1040 Oak leases land for use in its business. Free 1040 Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. Free 1040 However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. Free 1040 Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. Free 1040 If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. Free 1040 Oak cannot deduct the real estate taxes as rent until the tax bill is issued. Free 1040 This is when Oak's liability under the lease becomes fixed. Free 1040 Example 2. Free 1040 The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. Free 1040 As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. Free 1040 This is the year in which Oak's liability under the lease becomes fixed. Free 1040 Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. Free 1040 Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. Free 1040 If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. Free 1040 For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. Free 1040 The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. Free 1040 Option to renew. Free 1040   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. Free 1040 However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). Free 1040 Allocate the lease cost to the original term and any option term based on the facts and circumstances. Free 1040 In some cases, it may be appropriate to make the allocation using a present value computation. Free 1040 For more information, see Regulations section 1. Free 1040 178-1(b)(5). Free 1040 Example 1. Free 1040 You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. Free 1040 Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. Free 1040 Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. Free 1040 That is the remaining life of your present lease plus the periods for renewal. Free 1040 Example 2. Free 1040 The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. Free 1040 You can amortize the entire $10,000 over the 20-year remaining life of the original lease. Free 1040 The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). Free 1040 Cost of a modification agreement. Free 1040   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. Free 1040 You must capitalize these payments and amortize them over the remaining period of the lease. Free 1040 You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. Free 1040 Example. Free 1040 You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. Free 1040 However, before you occupy it, you decide that you really need less space. Free 1040 The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. Free 1040 In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. Free 1040   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. Free 1040 Your amortization deduction each year will be $150 ($3,000 ÷ 20). Free 1040 You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. Free 1040 Commissions, bonuses, and fees. Free 1040   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. Free 1040 You must amortize these costs over the term of the lease. Free 1040 Loss on merchandise and fixtures. Free 1040   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. Free 1040 You must capitalize the loss and amortize it over the remaining term of the lease. Free 1040 Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). Free 1040 Depreciate the property over its appropriate recovery period. Free 1040 You cannot amortize the cost over the remaining term of the lease. Free 1040 If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. Free 1040 For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. Free 1040 Assignment of a lease. Free 1040   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. Free 1040 If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. Free 1040 The rest is for your investment in the permanent improvements. Free 1040   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. Free 1040 You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. Free 1040 Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Free 1040 Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Free 1040 You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free 1040 Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. Free 1040 Uniform capitalization rules. Free 1040   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Free 1040 Produce real property or tangible personal property. Free 1040 For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Free 1040 Acquire property for resale. Free 1040 However, these rules do not apply to the following property. Free 1040 Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. Free 1040 Property you produce if you meet either of the following conditions. Free 1040 Your indirect costs of producing the property are $200,000 or less. Free 1040 You use the cash method of accounting and do not account for inventories. Free 1040 Example 1. Free 1040 You rent construction equipment to build a storage facility. Free 1040 If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. Free 1040 You recover your cost by claiming a deduction for depreciation on the building. Free 1040 Example 2. Free 1040 You rent space in a facility to conduct your business of manufacturing tools. Free 1040 If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. Free 1040 More information. Free 1040   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. Free 1040 Prev  Up  Next   Home   More Online Publications
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Virginia Office of the Attorney General

Website: Virginia Office of the Attorney General

Address: Virginia Office of the Attorney General
Consumer Protection Section
900 E. Main St.
Richmond, VA 23219

Phone Number: 804-786-2042

Toll-free: 1-800-552-9963 (VA)

TTY: 1-800-828-1120

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Regional Consumer Protection Offices

Office of the Attorney General- Northern Virginia

Website: Office of the Attorney General- Northern Virginia

Address: Office of the Attorney General- Northern Virginia
10555 Main St., Suite 350
Fairfax, VA 22030

Phone Number: 703-277-3540

Office of the Attorney General- Southwest Region

Website: Office of the Attorney General- Southwest Region

Address: Office of the Attorney General- Southwest Region
204 Abingdon Place
Abingdon, VA 24211

Phone Number: 276-628-2759

Office of the Attorney General- Western Region

Website: Office of the Attorney General- Western Region

Address: Office of the Attorney General- Western Region
3033 Peters Creek Rd.
Roanoke, VA 24019

Phone Number: 540-562-3570

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County Consumer Protection Offices

Fairfax County Department of Cable Communications and Consumer Protection

Website: Fairfax County Department of Cable Communications and Consumer Protection

Address: Fairfax County Department of Cable Communications and Consumer Protection
12000 Government Center Pkwy., Suite 433
Fairfax, VA 22035

Phone Number: 703-222-8435

TTY: 711

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

State Corporation Commission

Website: State Corporation Commission

Address: State Corporation Commission
Bureau of Financial Institutions
PO Box 640
Richmond, VA 23218

Phone Number: 804-371-9657

Toll-free: 1-800-552-7945 (VA)

TTY: 804-371-9206

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

State Corporation Commission

Website: State Corporation Commission

Address: State Corporation Commission
Bureau of Insurance
PO Box 1157
Richmond, VA 23218-1157

Phone Number: 804-371-9741

Toll-free: 1-877-310-6560

TTY: 804-371-9206

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

State Corporation Commission

Website: State Corporation Commission

Address: State Corporation Commission
Division of Securities and Retail Franchising
PO Box 1197
Richmond, VA 23218

Phone Number: 804-371-9051

Toll-free: 1-800-552-7945 (VA)

TTY: 804-371-9206

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

State Corporation Commission

Website: State Corporation Commission

Address: State Corporation Commission
Division of Energy Regulation
PO Box 1197
Richmond, VA 23218

Phone Number: 804-371-9611

Toll-free: 1-800-552-7945 (VA)

TTY: 804-371-9206

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The Free 1040

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