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Affordable Care Act (ACA) Tax Provisions

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The health care law addresses health insurance coverage and financial assistance options for individuals and families, including the premium tax credit. It also includes the individual shared responsibility provision and exemptions from that provision.The IRS administers the tax provisions included in the law. Visit HealthCare.gov for more information on coverage options and assistance.
 


 

   
The health care law contains many tax and other provisions for employers. The IRS administers the tax provisions included in the law. Visit HealthCare.gov and SBA.gov/healthcare for more information on other provisions.
 


 

 
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Free income tax preparation Publication 936 - Main Content Table of Contents Part I. Free income tax preparation Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. Free income tax preparation Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. Free income tax preparation Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Free income tax preparation It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Free income tax preparation Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Free income tax preparation The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Free income tax preparation You can deduct home mortgage interest if all the following conditions are met. Free income tax preparation You file Form 1040 and itemize deductions on Schedule A (Form 1040). Free income tax preparation The mortgage is a secured debt on a qualified home in which you have an ownership interest. Free income tax preparation Secured Debt and Qualified Home are explained later. Free income tax preparation  Both you and the lender must intend that the loan be repaid. Free income tax preparation Fully deductible interest. Free income tax preparation   In most cases, you can deduct all of your home mortgage interest. Free income tax preparation 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 income tax preparation   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 income tax preparation (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 income tax preparation ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. Free income tax preparation   The three categories are as follows. Free income tax preparation Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Free income tax preparation 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 income tax preparation 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 income tax preparation The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Free income tax preparation   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Free income tax preparation    You can use Figure A to check whether your home mortgage interest is fully deductible. Free income tax preparation This image is too large to be displayed in the current screen. Free income tax preparation Please click the link to view the image. Free income tax preparation Figure A. Free income tax preparation Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Free income tax preparation A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. Free income tax preparation In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Free income tax preparation If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Free income tax preparation In this publication, mortgage will refer to secured debt. Free income tax preparation Debt not secured by home. Free income tax preparation   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). Free income tax preparation   A debt is not secured by your home if it once was, but is no longer secured by your home. Free income tax preparation Wraparound mortgage. Free income tax preparation   This is not a secured debt unless it is recorded or otherwise perfected under state law. Free income tax preparation Example. Free income tax preparation Beth owns a home subject to a mortgage of $40,000. Free income tax preparation She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Free income tax preparation Beth continues to make the payments on the $40,000 note. Free income tax preparation John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Free income tax preparation Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Free income tax preparation Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Free income tax preparation Choice to treat the debt as not secured by your home. Free income tax preparation   You can choose to treat any debt secured by your qualified home as not secured by the home. Free income tax preparation This treatment begins with the tax year for which you make the choice and continues for all later tax years. Free income tax preparation You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Free income tax preparation   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. Free income tax preparation This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Free income tax preparation Cooperative apartment owner. Free income tax preparation   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. Free income tax preparation Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Free income tax preparation This means your main home or your second home. Free income tax preparation A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Free income tax preparation The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Free income tax preparation Otherwise, it is considered personal interest and is not deductible. Free income tax preparation Main home. Free income tax preparation   You can have only one main home at any one time. Free income tax preparation This is the home where you ordinarily live most of the time. Free income tax preparation Second home. Free income tax preparation   A second home is a home that you choose to treat as your second home. Free income tax preparation Second home not rented out. Free income tax preparation   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. Free income tax preparation You do not have to use the home during the year. Free income tax preparation Second home rented out. Free income tax preparation   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. Free income tax preparation You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. Free income tax preparation If you do not use the home long enough, it is considered rental property and not a second home. Free income tax preparation For information on residential rental property, see Publication 527. Free income tax preparation More than one second home. Free income tax preparation   If you have more than one second home, you can treat only one as the qualified second home during any year. Free income tax preparation However, you can change the home you treat as a second home during the year in the following situations. Free income tax preparation If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. Free income tax preparation If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. Free income tax preparation If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. Free income tax preparation Divided use of your home. Free income tax preparation   The only part of your home that is considered a qualified home is the part you use for residential living. Free income tax preparation If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. Free income tax preparation You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Free income tax preparation Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. Free income tax preparation (See Home Acquisition Debt in Part II. Free income tax preparation ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Free income tax preparation Renting out part of home. Free income tax preparation   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. Free income tax preparation The rented part of your home is used by the tenant primarily for residential living. Free income tax preparation The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Free income tax preparation You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. Free income tax preparation If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Free income tax preparation Office in home. Free income tax preparation   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Free income tax preparation It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Free income tax preparation Home under construction. Free income tax preparation   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. Free income tax preparation   The 24-month period can start any time on or after the day construction begins. Free income tax preparation Home destroyed. Free income tax preparation   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. Free income tax preparation This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Free income tax preparation   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. Free income tax preparation   This rule applies to your main home and to a second home that you treat as a qualified home. Free income tax preparation Time-sharing arrangements. Free income tax preparation   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Free income tax preparation A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. Free income tax preparation Rental of time-share. Free income tax preparation   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. Free income tax preparation See Second home rented out , earlier, for the use requirement. Free income tax preparation To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. Free income tax preparation Married taxpayers. Free income tax preparation   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Free income tax preparation Separate returns. Free income tax preparation   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. Free income tax preparation However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Free income tax preparation Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Free income tax preparation It also describes certain special situations that may affect your deduction. Free income tax preparation Late payment charge on mortgage payment. Free income tax preparation   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 income tax preparation Mortgage prepayment penalty. Free income tax preparation   If you pay off your home mortgage early, you may have to pay a penalty. Free income tax preparation 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 income tax preparation Sale of home. Free income tax preparation   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. Free income tax preparation Example. Free income tax preparation John and Peggy Harris sold their home on May 7. Free income tax preparation Through April 30, they made home mortgage interest payments of $1,220. Free income tax preparation 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 income tax preparation Their mortgage interest deduction is $1,270 ($1,220 + $50). Free income tax preparation Prepaid interest. Free income tax preparation   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 income tax preparation You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Free income tax preparation However, there is an exception that applies to points, discussed later. Free income tax preparation Mortgage interest credit. Free income tax preparation    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 income tax preparation Figure the credit on Form 8396, Mortgage Interest Credit. Free income tax preparation If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Free income tax preparation   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Free income tax preparation Ministers' and military housing allowance. Free income tax preparation   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 income tax preparation Hardest Hit Fund and Emergency Homeowners' Loan Programs. Free income tax preparation   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 income tax preparation 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 income tax preparation 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 income tax preparation If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). Free income tax preparation 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 income tax preparation Mortgage assistance payments under section 235 of the National Housing Act. Free income tax preparation   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 income tax preparation You cannot deduct the interest that is paid for you. Free income tax preparation No other effect on taxes. Free income tax preparation   Do not include these mortgage assistance payments in your income. Free income tax preparation Also, do not use these payments to reduce other deductions, such as real estate taxes. Free income tax preparation Divorced or separated individuals. Free income tax preparation   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 income tax preparation See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Free income tax preparation Redeemable ground rents. Free income tax preparation   In some states (such as Maryland), you can buy your home subject to a ground rent. Free income tax preparation A ground rent is an obligation you assume to pay a fixed amount per year on the property. Free income tax preparation Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Free income tax preparation   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Free income tax preparation   A ground rent is a redeemable ground rent if all of the following are true. Free income tax preparation Your lease, including renewal periods, is for more than 15 years. Free income tax preparation You can freely assign the lease. Free income tax preparation You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specific amount. Free income tax preparation The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Free income tax preparation   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Free income tax preparation Nonredeemable ground rents. Free income tax preparation   Payments on a nonredeemable ground rent are not mortgage interest. Free income tax preparation You can deduct them as rent if they are a business expense or if they are for rental property. Free income tax preparation Reverse mortgages. Free income tax preparation   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 income tax preparation With a reverse mortgage, you retain title to your home. Free income tax preparation 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 income tax preparation Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Free income tax preparation Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Free income tax preparation Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Free income tax preparation Rental payments. Free income tax preparation   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 income tax preparation This is true even if the settlement papers call them interest. Free income tax preparation You cannot deduct these payments as home mortgage interest. Free income tax preparation Mortgage proceeds invested in tax-exempt securities. Free income tax preparation   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 income tax preparation “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Free income tax preparation Refunds of interest. Free income tax preparation   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 income tax preparation 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 income tax preparation However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Free income tax preparation This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Free income tax preparation If you need to include the refund in income, report it on Form 1040, line 21. Free income tax preparation   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 income tax preparation For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Free income tax preparation   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Free income tax preparation Cooperative apartment owner. Free income tax preparation   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Free income tax preparation The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Free income tax preparation   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Free income tax preparation Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Free income tax preparation Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Free income tax preparation This image is too large to be displayed in the current screen. Free income tax preparation Please click the link to view the image. Free income tax preparation Figure B. Free income tax preparation Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Free income tax preparation See Points paid by the seller , later. Free income tax preparation General Rule You generally cannot deduct the full amount of points in the year paid. Free income tax preparation Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Free income tax preparation See Deduction Allowed Ratably , next. Free income tax preparation For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Free income tax preparation 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 income tax preparation You use the cash method of accounting. Free income tax preparation This means you report income in the year you receive it and deduct expenses in the year you pay them. Free income tax preparation Most individuals use this method. Free income tax preparation Your loan is secured by a home. Free income tax preparation (The home does not need to be your main home. Free income tax preparation ) Your loan period is not more than 30 years. Free income tax preparation 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 income tax preparation 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 income tax preparation Example. Free income tax preparation You use the cash method of accounting. Free income tax preparation In 2013, you took out a $100,000 loan payable over 20 years. Free income tax preparation The terms of the loan are the same as for other 20-year loans offered in your area. Free income tax preparation You paid $4,800 in points. Free income tax preparation You made 3 monthly payments on the loan in 2013. Free income tax preparation You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Free income tax preparation In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Free income tax preparation Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Free income tax preparation (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Free income tax preparation ) Your loan is secured by your main home. Free income tax preparation (Your main home is the one you ordinarily live in most of the time. Free income tax preparation ) Paying points is an established business practice in the area where the loan was made. Free income tax preparation The points paid were not more than the points generally charged in that area. Free income tax preparation You use the cash method of accounting. Free income tax preparation This means you report income in the year you receive it and deduct expenses in the year you pay them. Free income tax preparation Most individuals use this method. Free income tax preparation 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 income tax preparation The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Free income tax preparation The funds you provided are not required to have been applied to the points. Free income tax preparation They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Free income tax preparation You cannot have borrowed these funds from your lender or mortgage broker. Free income tax preparation You use your loan to buy or build your main home. Free income tax preparation The points were computed as a percentage of the principal amount of the mortgage. Free income tax preparation The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Free income tax preparation The points may be shown as paid from either your funds or the seller's. Free income tax preparation Note. Free income tax preparation 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 income tax preparation Home improvement loan. Free income tax preparation   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 income tax preparation Second home. Free income tax preparation You cannot fully deduct in the year paid points you pay on loans secured by your second home. Free income tax preparation You can deduct these points only over the life of the loan. Free income tax preparation Refinancing. Free income tax preparation   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Free income tax preparation This is true even if the new mortgage is secured by your main home. Free income tax preparation   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Free income tax preparation You can deduct the rest of the points over the life of the loan. Free income tax preparation Example 1. Free income tax preparation In 1998, Bill Fields got a mortgage to buy a home. Free income tax preparation In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Free income tax preparation The mortgage is secured by his home. Free income tax preparation To get the new loan, he had to pay three points ($3,000). Free income tax preparation 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 income tax preparation Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Free income tax preparation 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 income tax preparation Bill's first payment on the new loan was due July 1. Free income tax preparation He made six payments on the loan in 2013 and is a cash basis taxpayer. Free income tax preparation Bill used the funds from the new mortgage to repay his existing mortgage. Free income tax preparation 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 income tax preparation He cannot deduct all of the points in 2013. Free income tax preparation He can deduct two points ($2,000) ratably over the life of the loan. Free income tax preparation He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Free income tax preparation The other point ($1,000) was a fee for services and is not deductible. Free income tax preparation Example 2. Free income tax preparation 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 income tax preparation Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Free income tax preparation His deduction is $500 ($2,000 × 25%). Free income tax preparation 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 income tax preparation This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Free income tax preparation The total amount Bill deducts in 2013 is $550 ($500 + $50). Free income tax preparation Special Situations This section describes certain special situations that may affect your deduction of points. Free income tax preparation Original issue discount. Free income tax preparation   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 income tax preparation This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Free income tax preparation Amounts charged for services. Free income tax preparation    Amounts charged by the lender for specific services connected to the loan are not interest. Free income tax preparation Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Free income tax preparation  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Free income tax preparation Points paid by the seller. Free income tax preparation   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Free income tax preparation Treatment by seller. Free income tax preparation   The seller cannot deduct these fees as interest. Free income tax preparation But they are a selling expense that reduces the amount realized by the seller. Free income tax preparation See Publication 523 for information on selling your home. Free income tax preparation Treatment by buyer. Free income tax preparation   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 income tax preparation If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Free income tax preparation If any of those tests are not met, the buyer deducts the points over the life of the loan. Free income tax preparation   If you need information about the basis of your home, see Publication 523 or Publication 530. Free income tax preparation Funds provided are less than points. Free income tax preparation   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 income tax preparation In addition, you can deduct any points paid by the seller. Free income tax preparation Example 1. Free income tax preparation When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Free income tax preparation You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Free income tax preparation Of the $1,000 charged for points, you can deduct $750 in the year paid. Free income tax preparation You spread the remaining $250 over the life of the mortgage. Free income tax preparation Example 2. Free income tax preparation 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 income tax preparation 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 income tax preparation You spread the remaining $250 over the life of the mortgage. Free income tax preparation You must reduce the basis of your home by the $1,000 paid by the seller. Free income tax preparation Excess points. Free income tax preparation   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 income tax preparation You must spread any additional points over the life of the mortgage. Free income tax preparation Mortgage ending early. Free income tax preparation   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 income tax preparation However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Free income tax preparation Instead, deduct the remaining balance over the term of the new loan. Free income tax preparation   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Free income tax preparation Example. Free income tax preparation Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Free income tax preparation He deducts $200 points per year. Free income tax preparation Through 2012, Dan has deducted $2,200 of the points. Free income tax preparation Dan prepaid his mortgage in full in 2013. Free income tax preparation He can deduct the remaining $800 of points in 2013. Free income tax preparation Limits on deduction. Free income tax preparation   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Free income tax preparation See the Table 1 Instructions for line 10. Free income tax preparation Form 1098. Free income tax preparation    The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Free income tax preparation See Form 1098, Mortgage Interest Statement , later. Free income tax preparation Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Free income tax preparation The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Free income tax preparation Qualified mortgage insurance. Free income tax preparation   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 income tax preparation   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Free income tax preparation If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Free income tax preparation The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. Free income tax preparation These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Free income tax preparation Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Free income tax preparation Special rules for prepaid mortgage insurance. Free income tax preparation   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Free income tax preparation 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 income tax preparation No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Free income tax preparation This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Free income tax preparation Example. Free income tax preparation Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Free income tax preparation Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Free income tax preparation 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 income tax preparation Ryan's adjusted gross income (AGI) for 2012 is $76,000. Free income tax preparation Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Free income tax preparation For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Free income tax preparation 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 income tax preparation Limit on deduction. Free income tax preparation   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 income tax preparation 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 income tax preparation If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Free income tax preparation Form 1098. Free income tax preparation   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. Free income tax preparation See Form 1098, Mortgage Interest Statement, next. Free income tax preparation 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 income tax preparation You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. Free income tax preparation A governmental unit is a person for purposes of furnishing the statement. Free income tax preparation The statement for each year should be sent to you by January 31 of the following year. Free income tax preparation A copy of this form will also be sent to the IRS. Free income tax preparation 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 income tax preparation However, it should not show any interest that was paid for you by a government agency. Free income tax preparation As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Free income tax preparation 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 income tax preparation See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Free income tax preparation Prepaid interest on Form 1098. Free income tax preparation   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 income tax preparation However, you cannot deduct the prepaid amount for January 2014 in 2013. Free income tax preparation (See Prepaid interest , earlier. Free income tax preparation ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Free income tax preparation You will include the interest for January 2014 with other interest you pay for 2014. Free income tax preparation Refunded interest. Free income tax preparation   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 income tax preparation See Refunds of interest , earlier. Free income tax preparation Mortgage insurance premiums. Free income tax preparation   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Free income tax preparation See Mortgage Insurance Premiums , earlier. Free income tax preparation How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Free income tax preparation 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 income tax preparation Attach a statement explaining the difference and print “See attached” next to line 10. Free income tax preparation Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Free income tax preparation 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 income tax preparation The seller must give you this number and you must give the seller your TIN. Free income tax preparation A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Free income tax preparation Failure to meet any of these requirements may result in a $50 penalty for each failure. Free income tax preparation 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 income tax preparation 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 income tax preparation Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Free income tax preparation More than one borrower. Free income tax preparation   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 income tax preparation Show how much of the interest each of you paid, and give the name and address of the person who received the form. Free income tax preparation Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Free income tax preparation Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Free income tax preparation   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 income tax preparation Let each of the other borrowers know what his or her share is. Free income tax preparation Mortgage proceeds used for business or investment. Free income tax preparation   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. Free income tax preparation It shows where to deduct the part of your excess interest that is for those activities. Free income tax preparation The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. Free income tax preparation Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Free income tax preparation This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Free income tax preparation Cooperative housing corporation. Free income tax preparation   This is a corporation that meets all of the following conditions. Free income tax preparation Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. Free income tax preparation Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Free income tax preparation For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Free income tax preparation At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. Free income tax preparation At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. Free income tax preparation Stock used to secure debt. Free income tax preparation   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). Free income tax preparation However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. Free income tax preparation See chapter 4 of Publication 535 for details on these rules. Free income tax preparation Figuring deductible home mortgage interest. Free income tax preparation   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. Free income tax preparation The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. Free income tax preparation   Figure your share of this interest by multiplying the total by the following fraction. Free income tax preparation      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Free income tax preparation   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. Free income tax preparation The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Free income tax preparation (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Free income tax preparation ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. Free income tax preparation Form 1098. Free income tax preparation    The cooperative should give you a Form 1098 showing your share of the interest. Free income tax preparation Use the rules in this publication to determine your deductible mortgage interest. Free income tax preparation Part II. Free income tax preparation Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Free income tax preparation These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . Free income tax preparation Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. Free income tax preparation This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. Free income tax preparation Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Free income tax preparation Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). Free income tax preparation It also must be secured by that home. Free income tax preparation If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Free income tax preparation The additional debt may qualify as home equity debt (discussed later). Free income tax preparation Home acquisition debt limit. Free income tax preparation   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Free income tax preparation This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Free income tax preparation Debt over this limit may qualify as home equity debt (also discussed later). Free income tax preparation Refinanced home acquisition debt. Free income tax preparation   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Free income tax preparation However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Free income tax preparation Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). Free income tax preparation Mortgage that qualifies later. Free income tax preparation   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Free income tax preparation For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. Free income tax preparation However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Free income tax preparation Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Free income tax preparation However, if the property later becomes a qualified home, the debt may qualify after that time. Free income tax preparation Mortgage treated as used to buy, build, or improve home. Free income tax preparation   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. Free income tax preparation This applies in the following situations. Free income tax preparation You buy your home within 90 days before or after the date you take out the mortgage. Free income tax preparation The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). Free income tax preparation (See Example 1 later. Free income tax preparation ) You build or improve your home and take out the mortgage before the work is completed. Free income tax preparation The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Free income tax preparation You build or improve your home and take out the mortgage within 90 days after the work is completed. Free income tax preparation The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. Free income tax preparation (See Example 2 later. Free income tax preparation ) Example 1. Free income tax preparation You bought your main home on June 3 for $175,000. Free income tax preparation You paid for the home with cash you got from the sale of your old home. Free income tax preparation On July 15, you took out a mortgage of $150,000 secured by your main home. Free income tax preparation You used the $150,000 to invest in stocks. Free income tax preparation You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. Free income tax preparation The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Free income tax preparation Example 2. Free income tax preparation On January 31, John began building a home on the lot that he owned. Free income tax preparation He used $45,000 of his personal funds to build the home. Free income tax preparation The home was completed on October 31. Free income tax preparation On November 21, John took out a $36,000 mortgage that was secured by the home. Free income tax preparation The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Free income tax preparation The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. Free income tax preparation This is illustrated by Figure C. Free income tax preparation   Please click here for the text description of the image. Free income tax preparation Figure C. Free income tax preparation John's example Date of the mortgage. Free income tax preparation   The date you take out your mortgage is the day the loan proceeds are disbursed. Free income tax preparation This is generally the closing date. Free income tax preparation You can treat the day you apply in writing for your mortgage as the date you take it out. Free income tax preparation However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Free income tax preparation If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Free income tax preparation Cost of home or improvements. Free income tax preparation   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Free income tax preparation   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. Free income tax preparation Substantial improvement. Free income tax preparation   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. Free income tax preparation    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Free income tax preparation However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. Free income tax preparation Acquiring an interest in a home because of a divorce. Free income tax preparation   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. Free income tax preparation Part of home not a qualified home. Free income tax preparation    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. Free income tax preparation See Divided use of your home under Qualified Home in Part I. Free income tax preparation Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Free income tax preparation In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Free income tax preparation Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. Free income tax preparation Example. Free income tax preparation You bought your home for cash 10 years ago. Free income tax preparation You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. Free income tax preparation This loan is home equity debt. Free income tax preparation Home equity debt limit. Free income tax preparation   There is a limit on the amount of debt that can be treated as home equity debt. Free income tax preparation The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Free income tax preparation Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Free income tax preparation Example. Free income tax preparation You own one home that you bought in 2000. Free income tax preparation Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Free income tax preparation Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Free income tax preparation To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Free income tax preparation Your home equity debt is limited to $15,000. Free income tax preparation This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. Free income tax preparation Debt higher than limit. Free income tax preparation   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. Free income tax preparation But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Free income tax preparation If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Free income tax preparation Part of home not a qualified home. Free income tax preparation   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. Free income tax preparation See Divided use of your home under Qualified Home in Part I. Free income tax preparation Fair market value (FMV). Free income tax preparation    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Free income tax preparation Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. Free income tax preparation Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. Free income tax preparation To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Free income tax preparation How you used the proceeds does not matter. Free income tax preparation Grandfathered debt is not limited. Free income tax preparation All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Free income tax preparation However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. Free income tax preparation Refinanced grandfathered debt. Free income tax preparation   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. Free income tax preparation To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). Free income tax preparation The debt must be secured by the qualified home. Free income tax preparation   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. Free income tax preparation After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Free income tax preparation Exception. Free income tax preparation   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. Free income tax preparation This term cannot be more than 30 years. Free income tax preparation Example. Free income tax preparation Chester took out a $200,000 first mortgage on his home in 1986. Free income tax preparation The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Free income tax preparation Chester refinanced the debt in 1991 with a new 20-year mortgage. Free income tax preparation The refinanced debt is treated as grandfathered debt for its entire term (20 years). Free income tax preparation Line-of-credit mortgage. Free income tax preparation    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. Free income tax preparation The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Free income tax preparation The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Free income tax preparation See Average Mortgage Balance in the Table 1 Instructions that follow. Free income tax preparation Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. Free income tax preparation All the mortgages are grandfathered debt. Free income tax preparation The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Free income tax preparation In either of those cases, you do not need Table 1. Free income tax preparation Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Free income tax preparation Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Free income tax preparation Table 1. Free income tax preparation Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Free income tax preparation Part I Qualified Loan Limit 1. Free income tax preparation Enter the average balance of all your grandfathered debt. Free income tax preparation See line 1 instructions 1. Free income tax preparation   2. Free income tax preparation Enter the average balance of all your home acquisition debt. Free income tax preparation See line 2 instructions 2. Free income tax preparation   3. Free income tax preparation Enter $1,000,000 ($500,000 if married filing separately) 3. Free income tax preparation   4. Free income tax preparation Enter the larger of the amount on line 1 or the amount on line 3 4. Free income tax preparation   5. Free income tax preparation Add the amounts on lines 1 and 2. Free income tax preparation Enter the total here 5. Free income tax preparation   6. Free income tax preparation Enter the smaller of the amount on line 4 or the amount on line 5 6. Free income tax preparation   7. Free income tax preparation If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Free income tax preparation See the line 7 instructions for the limit which may apply to you. Free income tax preparation 7. Free income tax preparation   8. Free income tax preparation Add the amounts on lines 6 and 7. Free income tax preparation Enter the total. Free income tax preparation This is your qualified loan limit. Free income tax preparation 8. Free income tax preparation   Part II Deductible Home Mortgage Interest 9. Free income tax preparation Enter the total of the average balances of all mortgages on all qualified homes. Free income tax preparation  See line 9 instructions 9. Free income tax preparation     If line 8 is less than line 9, go on to line 10. Free income tax preparation If line 8 is equal to or more than line 9, stop here. Free income tax preparation All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Free income tax preparation     10. Free income tax preparation Enter the total amount of interest that you paid. Free income tax preparation See line 10 instructions 10. Free income tax preparation   11. Free income tax preparation Divide the amount on line 8 by the amount on line 9. Free income tax preparation Enter the result as a decimal amount (rounded to three places) 11. Free income tax preparation × . Free income tax preparation 12. Free income tax preparation Multiply the amount on line 10 by the decimal amount on line 11. Free income tax preparation Enter the result. Free income tax preparation This is your deductible home mortgage interest. Free income tax preparation Enter this amount on Schedule A (Form 1040) 12. Free income tax preparation   13. Free income tax preparation Subtract the amount on line 12 from the amount on line 10. Free income tax preparation Enter the result. Free income tax preparation This is not home mortgage interest. Free income tax preparation See line 13 instructions 13. Free income tax preparation   Home equity debt only. Free income tax preparation   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Free income tax preparation Enter zero on line 6 and complete the rest of Table 1. Free income tax preparation Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Free income tax preparation You need these amounts to complete lines 1, 2, and 9 of Table 1. Free income tax preparation You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Free income tax preparation The following are methods you can use to figure your average mortgage balances. Free income tax preparation However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Free income tax preparation Average of first and last balance method. Free income tax preparation   You can use this method if all the following apply. Free income tax preparation You did not borrow any new amounts on the mortgage during the year. Free income tax preparation (This does not include borrowing the original mortgage amount. Free income tax preparation ) You did not prepay more than one month's principal during the year. Free income tax preparation (This includes prepayment by refinancing your home or by applying proceeds from its sale. Free income tax preparation ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Free income tax preparation You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Free income tax preparation    To figure your average balance, complete the following worksheet. Free income tax preparation    1. Free income tax preparation Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. Free income tax preparation Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. Free income tax preparation Add amounts on lines 1 and 2   4. Free income tax preparation Divide the amount on line 3 by 2. Free income tax preparation Enter the result   Interest paid divided by interest rate method. Free income tax preparation   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. Free income tax preparation    Complete the following worksheet to figure your average balance. Free income tax preparation    1. Free income tax preparation Enter the interest paid in 2013. Free income tax preparation Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Free income tax preparation However, do include interest that is for 2013 but was paid in an earlier year   2. Free income tax preparation Enter the annual interest rate on the mortgage. Free income tax preparation If the interest rate varied in 2013, use the lowest rate for the year   3. Free income tax preparation Divide the amount on line 1 by the amount on line 2. Free income tax preparation Enter the result   Example. Free income tax preparation Mr. Free income tax preparation Blue had a line of credit secured by his main home all year. Free income tax preparation He paid interest of $2,500 on this loan. Free income tax preparation The interest rate on the loan was 9% (. Free income tax preparation 09) all year. Free income tax preparation His average balance using this method is $27,778, figured as follows. Free income tax preparation 1. Free income tax preparation Enter the interest paid in 2013. Free income tax preparation Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Free income tax preparation However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Free income tax preparation Enter the annual interest rate on the mortgage. Free income tax preparation If the interest rate varied in 2013, use the lowest rate for the year . Free income tax preparation 09 3. Free income tax preparation Divide the amount on line 1 by the amount on line 2. Free income tax preparation Enter the result $27,778 Statements provided by your lender. Free income tax preparation   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. Free income tax preparation You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Free income tax preparation   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. Free income tax preparation   If your lender can give you your average balance for the year, you can use that amount. Free income tax preparation Example. Free income tax preparation Ms. Free income tax preparation Brown had a home equity loan secured by her main home all year. Free income tax preparation She received monthly statements showing her average balance for each month. Free income tax preparation She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Free income tax preparation Mixed-use mortgages. Free income tax preparation   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). Free income tax preparation For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). Free income tax preparation   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. Free income tax preparation Do not use the methods described earlier in this section to figure the average balance of either category. Free income tax preparation Instead, for each category, use the following method. Free income tax preparation Figure the balance of that category of debt for each month. Free income tax preparation This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Free income tax preparation Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. Free income tax preparation Add together the monthly balances figured in (1). Free income tax preparation Divide the result in (2) by 12. Free income tax preparation   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. Free income tax preparation Example 1. Free income tax preparation In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Free income tax preparation On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. Free income tax preparation She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Free income tax preparation Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Free income tax preparation During 2013, her principal payments on the second mortgage totaled $10,000. Free income tax preparation To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. Free income tax preparation The January and February balances were zero. Free income tax preparation The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Free income tax preparation (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Free income tax preparation ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Free income tax preparation Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Free income tax preparation Example 2. Free income tax preparation The facts are the same as in Example 1. Free income tax preparation In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Free income tax preparation The balance of the home acquisition debt remains $180,000 for each of those months. Free income tax preparation Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). Free income tax preparation The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Free income tax preparation Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Free income tax preparation L