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H And R Block 2012 Tax Return

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H And R Block 2012 Tax Return

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Sale of Assets Financed with Tax-Exempt Bonds by State and Local Governments and 501(c)(3) Organizations

Tax Exempt Bonds (“TEB”) focuses on providing participants in the municipal bond industry with quality service to assist issuers and conduit borrowers in understanding their tax responsibilities. TEB has initiated an outreach and educational services program to increase understanding and compliance with tax law applicable to tax-exempt bonds. As part of this service TEB is providing the following information with respect to the sale of property financed by tax-exempt bonds. Governmental issuers and 501(c)(3) organizations may use this information to establish practices to monitor tax compliance throughout the period that their bonds are outstanding. This information is not intended to be cited as an authoritative source. TEB recommends that issuers and 501(c)(3) organizations review this basic information concerning remedial actions in consultation with their counsel.

For remedial action with respect to exempt facility bonds, see section 1.142-2 of the Income Tax Regulations (the “Regulations”), and for build America bonds, see IRM 7.2.3.1.2.3.

Generally

To raise needed funds, state and local governments and 501(c)(3) organizations may plan to sell property financed with tax-exempt bonds. The sale of such property could cause the bond issue to become taxable. A timely remedial action, if necessary, will help ensure that the interest on the bond issue remains tax-exempt.

There are three basic remedial action options as generally described below:

  • Redemption or defeasance of nonqualified bonds
  • Alternative use of disposition proceeds
  • Alternative use of facility

Governmental Bonds Example

A governmental bond is one that is not a private activity bond. A bond is a private activity bond if both: (i) more than 10% of the proceeds of a bond issue are used for a private business use (the private business use test); and (ii) more than 10% of the debt service on the bonds is directly or indirectly secured by an interest in property or payments with respect to property used for a private business use or derived from payments in respect of property used for a private business use (the private security or payment test). The sale of bond-financed property, a “deliberate action,” may cause the bond issue to meet both of these tests.

Private business use, generally, is use directly or indirectly in a trade or business carried on by any person other than a governmental unit. The result of meeting both the private business use test and the private security or payment test (together, the private business tests) is that the tax-exempt bond issue becomes a taxable private activity bond.

An example of when governmental bonds are likely to meet the private business tests is the sale of a tax-exempt bond financed facility to a corporation. The sale is a deliberate action because the sale was within the issuer’s control. Depending on how much of the proceeds of the bond issue that the issuer used to construct or acquire the facility and how long after the bonds are issued that the sale occurs, the private business use test may be met since the purchaser is not a governmental entity. If the present value of the sales price is greater than 10% of the present value of the debt service on the bonds, the private security or payment test is met. If the revenues from the facility were pledged as security for the payment of debt service on the bonds and are expected to be more than 10% of the present value of the debt service, the private security or payment test is met (regardless of the sales price to the new purchaser). If the bond issue meets both the private business use test and the private security or payment test, the bonds are taxable unless remedial action is taken as described below.

Qualified 501(c)(3) Bonds Example

If the bonds financing the property are qualified 501(c)(3) bonds, the private business use test threshold of 10% is reduced to 5%. The 5% is further reduced by the percentage of proceeds of the bonds used to pay costs of issuance. (Up to 2% of the proceeds may be used for costs of issuance.) Additionally, use of tax-exempt bond financed property in an unrelated trade or business of any 501(c)(3) organization, as described in section 513 of the Internal Revenue Code (the “Code”), is considered private business use and counts toward the 5% limit.

An example of qualified 501(c)(3) bonds likely to meet the private business tests is the sale of tax-exempt bond financed land to a taxable corporation. The sale is a deliberate action because the sale was within the issuer’s (or 501(c)(3) borrower’s) control. Depending on how much of the proceeds of the bond issue that the issuer or 501(c)(3) borrower used to construct or acquire the facility and how long after the bonds are issued that the sale occurs, the private business use test may be met since the purchaser is not a governmental entity or a 501(c)(3) organization. If the parcel of land sold was pledged as security for the payment of debt service on the bonds, the private security or payment test is met if the sales price is more than 5% of the present value of the debt service on the bonds. If the revenues from the facility were pledged as security for the payment of debt service on the bonds and are expected to be more than 5% of the present value of the debt service, the private security or payment test is met (regardless of the sales price to the new purchaser). If the bond issue meets both the private business use test and the private security or payment test, the bonds are taxable unless remedial action is taken as described below.

A qualified 501(c)(3) bond is one where, among other requirements, the tax-exempt bond financed property is owned by a 501(c)(3) organization or a governmental unit. An example of qualified 501(c)(3) bonds failing to meet this requirement is the sale of the tax-exempt bond financed land to a taxable corporation. Accordingly, the bonds are taxable unless remedial action is taken as described below.

Remedial Action under the Treasury Regulations

The Regulations permit an issuer to take remedial action to preclude the sale of tax-exempt bond financed assets from causing the bonds to become taxable bonds. There are five basic conditions that an issuer must meet to qualify to take a remedial action. The conditions are:

  • The issuer must have reasonably expected on the issue date that the bonds would not meet either the applicable private business tests (including the ownership test for qualified 501(c)(3) bonds) or the private loan financing test for the entire term of the bonds.
  • The term of the bonds must not be longer than reasonably necessary for the qualified purposes of the issue (as a guideline, the term is not greater than 120% of the average reasonably expected economic life of the financed property).
  • Generally, the terms of a sale must be a bona fide and arm’s-length arrangement for fair market value.
  • Disposition proceeds must be treated as gross proceeds for arbitrage and rebate purposes. Disposition proceeds are any amounts, including property, derived from the sale, exchange or other disposition of the tax-exempt bond financed property.
  • Except for a remedial action involving the redemption or defeasance of nonqualified bonds, the proceeds must have been spent on a qualified purpose before the date of the deliberate action, that is, the sale of the bond-financed assets.

Redemption or Defeasance of Nonqualified Bonds

Generally, in the case of a sale of bond-financed property, the nonqualified bonds are the portion of the outstanding bonds equal to the percentage of the proceeds of the bond issue that financed that property. For example, if 50% of the proceeds of a bond issue financed the sold property, the nonqualified bonds equal 50% of the outstanding bonds of the issue at the time of the sale.

The first type of remedial action available is the redemption or defeasance of all of the nonqualified bonds within 90 days of the deliberate action. (Generally, proceeds of another issue of tax-exempt bonds may not be used for this redemption.) If the disposition proceeds are all cash, the issuer need not redeem or defease all of the nonqualified bonds, but must use all of the disposition proceeds to redeem a pro rata portion of nonqualified bonds. The redemption must be on the earliest call date after the deliberate action, or if the earliest call date is more than 90 days after the deliberate action, the issuer must establish a defeasance escrow within 90 days of the deliberate action. Defeasance is only permitted as a remedial action if the first call date is no more than 10 ½ years from the issue date of the bonds. The issuer must provide written notice to the Commissioner of the escrow within 90 days of its establishment.

Alternative Use of Disposition Proceeds

The second type of remedial action, available when the seller receives only cash, allows the issuer to spend the disposition proceeds within two years of the date of the sale for an alternative qualifying use. The issuer must treat the disposition proceeds as proceeds of the bonds, and must not take any action after the date of the sale to cause either the applicable private business use tests or the private loan financing test to be met. (If the bonds are qualified 501(c)(3) bonds, the disposition proceeds must be used for a qualified purpose under section 145 of the Code.) If the issuer does not expect the full amount of the disposition proceeds to be spent for a qualifying purpose within the two year period, it must use the balance of disposition proceeds to redeem (or defease) nonqualified bonds as allowed for the first type of remedial action described above.

Note: If the proceeds of a governmental bond issue are to be subsequently used by a 501(c)(3) organization, remediation by spending the disposition proceeds for an alternate use requires that the nonqualified bonds satisfy all the requirements for qualified 501(c)(3) bonds beginning on the date of the sale.

Alternative Use of Facility

The third type of remedial action available to the issuer is when the tax-exempt financed facility will be used after the sale for a purpose that is a qualifying purpose for another type of tax-exempt bonds (provided that the purchaser of the facility does not use tax-exempt bond proceeds for its purchase). The nonqualified bonds must satisfy all the requirements for the alternate type of tax-exempt bonds beginning on the date of the sale. The issuer must either apply any disposition proceeds resulting from the sale to pay the debt service on the bonds on the next available payment date or deposit the proceeds into an escrow within 90 days of their receipt. If the issuer must establish an escrow, the investment yield on the disposition proceeds must be restricted to the yield on the bonds and the escrow used to pay debt service on the next available payment date.

Allocation of Disposition Proceeds

For all three remedial actions, if the property was financed by different sources, the issuer must first allocate disposition proceeds to the outstanding bonds in proportion to the principal amounts of the outstanding bonds. If the disposition proceeds are not greater than the principal amount of outstanding bonds allocated to the sold property, the proceeds must first be allocated to the outstanding bonds before allocating to bonds no longer outstanding or to sources not derived from borrowing (such as revenues of the issuer).

Remedial Actions-Examples

The following examples assume that the above-described five conditions for remedial action are satisfied. Also, in these examples, no bond proceeds were used for costs of issuance or to fund a reserve fund.


Example 1. - Disposition proceeds are less than the principal amount of the outstanding bonds allocated to the sold property.

Issuer issues $10 million of bonds to finance the construction of a community center. Issuer later sells the center for $5 million, its fair market value. At this time, all $10 million of the bonds are still outstanding. The issuer may choose to remediate by using all $5 million of disposition proceeds to redeem within 90 days or establish a defeasance escrow for a pro rata portion of the $10 million of nonqualified bonds. The remaining outstanding $5 million of bonds would not be private activity bonds because the issuer has remediated as required by the Regulations.

Or, the issuer could remediate by using the alternative use of disposition proceeds option. Under this option, the issuer must apply the total amount of disposition proceeds, $5 million, to a qualifying alternative use within two years (or use a combination of the alternative use of disposition proceeds and redemption or defeasance options).

The disposition proceeds are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Example 2.- Disposition proceeds are greater than the principal amount of the outstanding bonds allocated to the sold property.

Issuer issues $10 million of bonds to finance a school and land. Issuer subsequently sells a portion of the land for $3 million. At this time, all $10 million of the bonds are still outstanding. The principal amount of outstanding bonds allocated to the sold property is $2 million. If the issuer chooses to remediate by redeeming bonds, it must redeem $2 million of outstanding bonds leaving the issuer with $1 million of gross proceeds.

Or, the issuer could remediate by using the alternative use of disposition proceeds option. If so, the Issuer must apply the total amount of the disposition proceeds, $3 million, to a qualifying use within two years (or use a combination of the alternative use of disposition proceeds and redemption or defeasance options).

The disposition proceeds are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Example 3. - Disposition proceeds are greater than the principal amount of the outstanding bonds allocated to the sold property and the conduit borrower finances the project in part with tax-exempt bond proceeds and in part with an equity contribution.

A 501(c)(3) conduit borrower contributed $4 million of cash from its revenues and used $6 million of tax-exempt bonds to finance a $10 million acquisition of a continuing care facility. Subsequently, the conduit borrower sells the facility for $12 million. At this time, all $6 million of the bonds are still outstanding. Thus the issuer has $6 million of nonqualified bonds. The issuer may remediate by either redeeming all of the $6 million nonqualified bonds or by requiring the conduit borrower to use $12 million of disposition proceeds for an alternative use within two years (provided all requirements of qualified 501(c)(3) bonds are met).

Of the $12 million of disposition proceeds, $6 million are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Gross Proceeds - Example 2 versus Example 3

When the tax-exempt bond financed property is sold for an amount in excess of the principal amount of the outstanding bonds allocated to that property, a different result occurs with respect to that excess amount depending on whether all the bonds of the issue have been redeemed. In Example 3, where the issuer redeemed all of the outstanding bonds, the remaining disposition proceeds are not gross proceeds of the bonds and, therefore, are no longer subject to the federal tax restrictions. This is because the amount of gross proceeds cannot exceed the amount of the outstanding bonds of the issue. Whereas in Example 2, although the issuer has redeemed the nonqualified bonds, the issuer still has bonds of the issue outstanding and thus the additional disposition proceeds are gross proceeds of the bonds and subject to the applicable yield restriction and arbitrage rebate rules pending their use.

Correction of Violations Using TEB Voluntary Closing Agreement Program (VCAP)

If an issuer or conduit borrower discovers that it has sold bond financed assets causing the applicable private business tests to be met but is ineligible to self-correct through a remedial action provision, TEB encourages the issuer to take advantage of its Voluntary Closing Agreement Program (TEB VCAP) to resolve federal tax violations relating to bonds as described in Notice 2008-31 and IRM section 7.2.3.

Page Last Reviewed or Updated: 04-Sep-2013

The H And R Block 2012 Tax Return

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