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Copy 2011 Taxes

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Copy 2011 Taxes

Copy 2011 taxes 9. Copy 2011 taxes   Obligations Not in Registered Form Tax is imposed on any person who issues a registration-required obligation not in registered form. Copy 2011 taxes The tax is: 1% of the principal of the obligation, multiplied by The number of calendar years (or portions of calendar years) during the period starting on the date the obligation was issued and ending on the date it matures. Copy 2011 taxes A registration-required obligation is any obligation other than one that meets any of the following conditions. Copy 2011 taxes It is issued by a natural person. Copy 2011 taxes It is not of a type offered to the public. Copy 2011 taxes It has a maturity (at issue) of not more than 1 year. Copy 2011 taxes It can only be issued to a foreign person. Copy 2011 taxes For item (4), if the obligation is not in registered form, the interest on the obligation must be payable only outside the United States and its possessions. Copy 2011 taxes Also, the obligation must state on its face that any U. Copy 2011 taxes S. Copy 2011 taxes person who holds it shall be subject to limits under the U. Copy 2011 taxes S. Copy 2011 taxes income tax laws. Copy 2011 taxes Prev  Up  Next   Home   More Online Publications
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The Copy 2011 Taxes

Copy 2011 taxes Publication 936 - Main Content Table of Contents Part I. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Copy 2011 taxes It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Copy 2011 taxes Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Copy 2011 taxes The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Copy 2011 taxes You can deduct home mortgage interest if all the following conditions are met. Copy 2011 taxes You file Form 1040 and itemize deductions on Schedule A (Form 1040). Copy 2011 taxes The mortgage is a secured debt on a qualified home in which you have an ownership interest. Copy 2011 taxes Secured Debt and Qualified Home are explained later. Copy 2011 taxes  Both you and the lender must intend that the loan be repaid. Copy 2011 taxes Fully deductible interest. Copy 2011 taxes   In most cases, you can deduct all of your home mortgage interest. Copy 2011 taxes How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Copy 2011 taxes   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. Copy 2011 taxes (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. Copy 2011 taxes ) 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. Copy 2011 taxes   The three categories are as follows. Copy 2011 taxes Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Copy 2011 taxes 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). Copy 2011 taxes 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). Copy 2011 taxes The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Copy 2011 taxes   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Copy 2011 taxes    You can use Figure A to check whether your home mortgage interest is fully deductible. Copy 2011 taxes This image is too large to be displayed in the current screen. Copy 2011 taxes Please click the link to view the image. Copy 2011 taxes Figure A. Copy 2011 taxes Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Copy 2011 taxes 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. Copy 2011 taxes In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Copy 2011 taxes If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Copy 2011 taxes In this publication, mortgage will refer to secured debt. Copy 2011 taxes Debt not secured by home. Copy 2011 taxes   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). Copy 2011 taxes   A debt is not secured by your home if it once was, but is no longer secured by your home. Copy 2011 taxes Wraparound mortgage. Copy 2011 taxes   This is not a secured debt unless it is recorded or otherwise perfected under state law. Copy 2011 taxes Example. Copy 2011 taxes Beth owns a home subject to a mortgage of $40,000. Copy 2011 taxes She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Copy 2011 taxes Beth continues to make the payments on the $40,000 note. Copy 2011 taxes John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Copy 2011 taxes Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Copy 2011 taxes Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Copy 2011 taxes Choice to treat the debt as not secured by your home. Copy 2011 taxes   You can choose to treat any debt secured by your qualified home as not secured by the home. Copy 2011 taxes This treatment begins with the tax year for which you make the choice and continues for all later tax years. Copy 2011 taxes You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes Cooperative apartment owner. Copy 2011 taxes   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. Copy 2011 taxes Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Copy 2011 taxes This means your main home or your second home. Copy 2011 taxes A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Copy 2011 taxes 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. Copy 2011 taxes Otherwise, it is considered personal interest and is not deductible. Copy 2011 taxes Main home. Copy 2011 taxes   You can have only one main home at any one time. Copy 2011 taxes This is the home where you ordinarily live most of the time. Copy 2011 taxes Second home. Copy 2011 taxes   A second home is a home that you choose to treat as your second home. Copy 2011 taxes Second home not rented out. Copy 2011 taxes   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. Copy 2011 taxes You do not have to use the home during the year. Copy 2011 taxes Second home rented out. Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes If you do not use the home long enough, it is considered rental property and not a second home. Copy 2011 taxes For information on residential rental property, see Publication 527. Copy 2011 taxes More than one second home. Copy 2011 taxes   If you have more than one second home, you can treat only one as the qualified second home during any year. Copy 2011 taxes However, you can change the home you treat as a second home during the year in the following situations. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Divided use of your home. Copy 2011 taxes   The only part of your home that is considered a qualified home is the part you use for residential living. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes (See Home Acquisition Debt in Part II. Copy 2011 taxes ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Copy 2011 taxes Renting out part of home. Copy 2011 taxes   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. Copy 2011 taxes The rented part of your home is used by the tenant primarily for residential living. Copy 2011 taxes The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Copy 2011 taxes 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. Copy 2011 taxes If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Copy 2011 taxes Office in home. Copy 2011 taxes   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Copy 2011 taxes It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Copy 2011 taxes Home under construction. Copy 2011 taxes   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. Copy 2011 taxes   The 24-month period can start any time on or after the day construction begins. Copy 2011 taxes Home destroyed. Copy 2011 taxes   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. Copy 2011 taxes This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Copy 2011 taxes   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. Copy 2011 taxes   This rule applies to your main home and to a second home that you treat as a qualified home. Copy 2011 taxes Time-sharing arrangements. Copy 2011 taxes   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Copy 2011 taxes 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. Copy 2011 taxes Rental of time-share. Copy 2011 taxes   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. Copy 2011 taxes See Second home rented out , earlier, for the use requirement. Copy 2011 taxes 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. Copy 2011 taxes Married taxpayers. Copy 2011 taxes   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Copy 2011 taxes Separate returns. Copy 2011 taxes   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. Copy 2011 taxes However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Copy 2011 taxes Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Copy 2011 taxes It also describes certain special situations that may affect your deduction. Copy 2011 taxes Late payment charge on mortgage payment. Copy 2011 taxes   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. Copy 2011 taxes Mortgage prepayment penalty. Copy 2011 taxes   If you pay off your home mortgage early, you may have to pay a penalty. Copy 2011 taxes 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. Copy 2011 taxes Sale of home. Copy 2011 taxes   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. Copy 2011 taxes Example. Copy 2011 taxes John and Peggy Harris sold their home on May 7. Copy 2011 taxes Through April 30, they made home mortgage interest payments of $1,220. Copy 2011 taxes 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. Copy 2011 taxes Their mortgage interest deduction is $1,270 ($1,220 + $50). Copy 2011 taxes Prepaid interest. Copy 2011 taxes   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. Copy 2011 taxes You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Copy 2011 taxes However, there is an exception that applies to points, discussed later. Copy 2011 taxes Mortgage interest credit. Copy 2011 taxes    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. Copy 2011 taxes Figure the credit on Form 8396, Mortgage Interest Credit. Copy 2011 taxes If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Copy 2011 taxes   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Copy 2011 taxes Ministers' and military housing allowance. Copy 2011 taxes   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. Copy 2011 taxes Hardest Hit Fund and Emergency Homeowners' Loan Programs. Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes 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). Copy 2011 taxes 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. Copy 2011 taxes Mortgage assistance payments under section 235 of the National Housing Act. Copy 2011 taxes   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. Copy 2011 taxes You cannot deduct the interest that is paid for you. Copy 2011 taxes No other effect on taxes. Copy 2011 taxes   Do not include these mortgage assistance payments in your income. Copy 2011 taxes Also, do not use these payments to reduce other deductions, such as real estate taxes. Copy 2011 taxes Divorced or separated individuals. Copy 2011 taxes   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. Copy 2011 taxes See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Copy 2011 taxes Redeemable ground rents. Copy 2011 taxes   In some states (such as Maryland), you can buy your home subject to a ground rent. Copy 2011 taxes A ground rent is an obligation you assume to pay a fixed amount per year on the property. Copy 2011 taxes Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Copy 2011 taxes   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Copy 2011 taxes   A ground rent is a redeemable ground rent if all of the following are true. Copy 2011 taxes Your lease, including renewal periods, is for more than 15 years. Copy 2011 taxes You can freely assign the lease. Copy 2011 taxes 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. Copy 2011 taxes The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Copy 2011 taxes   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Copy 2011 taxes Nonredeemable ground rents. Copy 2011 taxes   Payments on a nonredeemable ground rent are not mortgage interest. Copy 2011 taxes You can deduct them as rent if they are a business expense or if they are for rental property. Copy 2011 taxes Reverse mortgages. Copy 2011 taxes   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. Copy 2011 taxes With a reverse mortgage, you retain title to your home. Copy 2011 taxes 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. Copy 2011 taxes Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Copy 2011 taxes 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. Copy 2011 taxes Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Copy 2011 taxes Rental payments. Copy 2011 taxes   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Copy 2011 taxes This is true even if the settlement papers call them interest. Copy 2011 taxes You cannot deduct these payments as home mortgage interest. Copy 2011 taxes Mortgage proceeds invested in tax-exempt securities. Copy 2011 taxes   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. Copy 2011 taxes “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Copy 2011 taxes Refunds of interest. Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Copy 2011 taxes This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Copy 2011 taxes If you need to include the refund in income, report it on Form 1040, line 21. Copy 2011 taxes   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. Copy 2011 taxes For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Copy 2011 taxes   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Copy 2011 taxes Cooperative apartment owner. Copy 2011 taxes   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. Copy 2011 taxes The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Copy 2011 taxes   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Copy 2011 taxes Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Copy 2011 taxes Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Copy 2011 taxes This image is too large to be displayed in the current screen. Copy 2011 taxes Please click the link to view the image. Copy 2011 taxes Figure B. Copy 2011 taxes 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. Copy 2011 taxes See Points paid by the seller , later. Copy 2011 taxes General Rule You generally cannot deduct the full amount of points in the year paid. Copy 2011 taxes Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Copy 2011 taxes See Deduction Allowed Ratably , next. Copy 2011 taxes For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Copy 2011 taxes 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. Copy 2011 taxes You use the cash method of accounting. Copy 2011 taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Copy 2011 taxes Most individuals use this method. Copy 2011 taxes Your loan is secured by a home. Copy 2011 taxes (The home does not need to be your main home. Copy 2011 taxes ) Your loan period is not more than 30 years. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Example. Copy 2011 taxes You use the cash method of accounting. Copy 2011 taxes In 2013, you took out a $100,000 loan payable over 20 years. Copy 2011 taxes The terms of the loan are the same as for other 20-year loans offered in your area. Copy 2011 taxes You paid $4,800 in points. Copy 2011 taxes You made 3 monthly payments on the loan in 2013. Copy 2011 taxes You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Copy 2011 taxes In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Copy 2011 taxes Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Copy 2011 taxes (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Copy 2011 taxes ) Your loan is secured by your main home. Copy 2011 taxes (Your main home is the one you ordinarily live in most of the time. Copy 2011 taxes ) Paying points is an established business practice in the area where the loan was made. Copy 2011 taxes The points paid were not more than the points generally charged in that area. Copy 2011 taxes You use the cash method of accounting. Copy 2011 taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Copy 2011 taxes Most individuals use this method. Copy 2011 taxes 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. Copy 2011 taxes The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Copy 2011 taxes The funds you provided are not required to have been applied to the points. Copy 2011 taxes They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Copy 2011 taxes You cannot have borrowed these funds from your lender or mortgage broker. Copy 2011 taxes You use your loan to buy or build your main home. Copy 2011 taxes The points were computed as a percentage of the principal amount of the mortgage. Copy 2011 taxes The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Copy 2011 taxes The points may be shown as paid from either your funds or the seller's. Copy 2011 taxes Note. Copy 2011 taxes 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. Copy 2011 taxes Home improvement loan. Copy 2011 taxes   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. Copy 2011 taxes Second home. Copy 2011 taxes You cannot fully deduct in the year paid points you pay on loans secured by your second home. Copy 2011 taxes You can deduct these points only over the life of the loan. Copy 2011 taxes Refinancing. Copy 2011 taxes   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Copy 2011 taxes This is true even if the new mortgage is secured by your main home. Copy 2011 taxes   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. Copy 2011 taxes You can deduct the rest of the points over the life of the loan. Copy 2011 taxes Example 1. Copy 2011 taxes In 1998, Bill Fields got a mortgage to buy a home. Copy 2011 taxes In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Copy 2011 taxes The mortgage is secured by his home. Copy 2011 taxes To get the new loan, he had to pay three points ($3,000). Copy 2011 taxes 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. Copy 2011 taxes Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Copy 2011 taxes The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Copy 2011 taxes Bill's first payment on the new loan was due July 1. Copy 2011 taxes He made six payments on the loan in 2013 and is a cash basis taxpayer. Copy 2011 taxes Bill used the funds from the new mortgage to repay his existing mortgage. Copy 2011 taxes 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. Copy 2011 taxes He cannot deduct all of the points in 2013. Copy 2011 taxes He can deduct two points ($2,000) ratably over the life of the loan. Copy 2011 taxes He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Copy 2011 taxes The other point ($1,000) was a fee for services and is not deductible. Copy 2011 taxes Example 2. Copy 2011 taxes 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. Copy 2011 taxes Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Copy 2011 taxes His deduction is $500 ($2,000 × 25%). Copy 2011 taxes Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Copy 2011 taxes This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Copy 2011 taxes The total amount Bill deducts in 2013 is $550 ($500 + $50). Copy 2011 taxes Special Situations This section describes certain special situations that may affect your deduction of points. Copy 2011 taxes Original issue discount. Copy 2011 taxes   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. Copy 2011 taxes This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Copy 2011 taxes Amounts charged for services. Copy 2011 taxes    Amounts charged by the lender for specific services connected to the loan are not interest. Copy 2011 taxes Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Copy 2011 taxes  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Copy 2011 taxes Points paid by the seller. Copy 2011 taxes   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Copy 2011 taxes Treatment by seller. Copy 2011 taxes   The seller cannot deduct these fees as interest. Copy 2011 taxes But they are a selling expense that reduces the amount realized by the seller. Copy 2011 taxes See Publication 523 for information on selling your home. Copy 2011 taxes Treatment by buyer. Copy 2011 taxes   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. Copy 2011 taxes If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Copy 2011 taxes If any of those tests are not met, the buyer deducts the points over the life of the loan. Copy 2011 taxes   If you need information about the basis of your home, see Publication 523 or Publication 530. Copy 2011 taxes Funds provided are less than points. Copy 2011 taxes   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. Copy 2011 taxes In addition, you can deduct any points paid by the seller. Copy 2011 taxes Example 1. Copy 2011 taxes When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Copy 2011 taxes You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Copy 2011 taxes Of the $1,000 charged for points, you can deduct $750 in the year paid. Copy 2011 taxes You spread the remaining $250 over the life of the mortgage. Copy 2011 taxes Example 2. Copy 2011 taxes 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. Copy 2011 taxes In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Copy 2011 taxes You spread the remaining $250 over the life of the mortgage. Copy 2011 taxes You must reduce the basis of your home by the $1,000 paid by the seller. Copy 2011 taxes Excess points. Copy 2011 taxes   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. Copy 2011 taxes You must spread any additional points over the life of the mortgage. Copy 2011 taxes Mortgage ending early. Copy 2011 taxes   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. Copy 2011 taxes However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Copy 2011 taxes Instead, deduct the remaining balance over the term of the new loan. Copy 2011 taxes   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Copy 2011 taxes Example. Copy 2011 taxes Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Copy 2011 taxes He deducts $200 points per year. Copy 2011 taxes Through 2012, Dan has deducted $2,200 of the points. Copy 2011 taxes Dan prepaid his mortgage in full in 2013. Copy 2011 taxes He can deduct the remaining $800 of points in 2013. Copy 2011 taxes Limits on deduction. Copy 2011 taxes   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Copy 2011 taxes See the Table 1 Instructions for line 10. Copy 2011 taxes Form 1098. Copy 2011 taxes    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. Copy 2011 taxes See Form 1098, Mortgage Interest Statement , later. Copy 2011 taxes Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Copy 2011 taxes The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Copy 2011 taxes Qualified mortgage insurance. Copy 2011 taxes   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). Copy 2011 taxes   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Copy 2011 taxes If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Copy 2011 taxes 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. Copy 2011 taxes These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Copy 2011 taxes Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Copy 2011 taxes Special rules for prepaid mortgage insurance. Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Copy 2011 taxes This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Copy 2011 taxes Example. Copy 2011 taxes Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Copy 2011 taxes Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Copy 2011 taxes 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. Copy 2011 taxes Ryan's adjusted gross income (AGI) for 2012 is $76,000. Copy 2011 taxes Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Copy 2011 taxes For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Copy 2011 taxes 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). Copy 2011 taxes Limit on deduction. Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Copy 2011 taxes Form 1098. Copy 2011 taxes   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. Copy 2011 taxes See Form 1098, Mortgage Interest Statement, next. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes A governmental unit is a person for purposes of furnishing the statement. Copy 2011 taxes The statement for each year should be sent to you by January 31 of the following year. Copy 2011 taxes A copy of this form will also be sent to the IRS. Copy 2011 taxes 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. Copy 2011 taxes However, it should not show any interest that was paid for you by a government agency. Copy 2011 taxes As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Copy 2011 taxes However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Copy 2011 taxes See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Copy 2011 taxes Prepaid interest on Form 1098. Copy 2011 taxes   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. Copy 2011 taxes However, you cannot deduct the prepaid amount for January 2014 in 2013. Copy 2011 taxes (See Prepaid interest , earlier. Copy 2011 taxes ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Copy 2011 taxes You will include the interest for January 2014 with other interest you pay for 2014. Copy 2011 taxes Refunded interest. Copy 2011 taxes   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. Copy 2011 taxes See Refunds of interest , earlier. Copy 2011 taxes Mortgage insurance premiums. Copy 2011 taxes   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Copy 2011 taxes See Mortgage Insurance Premiums , earlier. Copy 2011 taxes How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Copy 2011 taxes 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. Copy 2011 taxes Attach a statement explaining the difference and print “See attached” next to line 10. Copy 2011 taxes Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Copy 2011 taxes 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. Copy 2011 taxes The seller must give you this number and you must give the seller your TIN. Copy 2011 taxes A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Copy 2011 taxes Failure to meet any of these requirements may result in a $50 penalty for each failure. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Copy 2011 taxes More than one borrower. Copy 2011 taxes   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. Copy 2011 taxes Show how much of the interest each of you paid, and give the name and address of the person who received the form. Copy 2011 taxes Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Copy 2011 taxes Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Copy 2011 taxes   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. Copy 2011 taxes Let each of the other borrowers know what his or her share is. Copy 2011 taxes Mortgage proceeds used for business or investment. Copy 2011 taxes   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. Copy 2011 taxes It shows where to deduct the part of your excess interest that is for those activities. Copy 2011 taxes 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. Copy 2011 taxes Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Copy 2011 taxes This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Copy 2011 taxes Cooperative housing corporation. Copy 2011 taxes   This is a corporation that meets all of the following conditions. Copy 2011 taxes 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. Copy 2011 taxes Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Copy 2011 taxes For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Stock used to secure debt. Copy 2011 taxes   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). Copy 2011 taxes 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. Copy 2011 taxes See chapter 4 of Publication 535 for details on these rules. Copy 2011 taxes Figuring deductible home mortgage interest. Copy 2011 taxes   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. Copy 2011 taxes 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. Copy 2011 taxes   Figure your share of this interest by multiplying the total by the following fraction. Copy 2011 taxes      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Copy 2011 taxes   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. Copy 2011 taxes The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Copy 2011 taxes (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Copy 2011 taxes ) 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. Copy 2011 taxes Form 1098. Copy 2011 taxes    The cooperative should give you a Form 1098 showing your share of the interest. Copy 2011 taxes Use the rules in this publication to determine your deductible mortgage interest. Copy 2011 taxes Part II. Copy 2011 taxes Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Copy 2011 taxes 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 . Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Copy 2011 taxes 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). Copy 2011 taxes It also must be secured by that home. Copy 2011 taxes 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. Copy 2011 taxes The additional debt may qualify as home equity debt (discussed later). Copy 2011 taxes Home acquisition debt limit. Copy 2011 taxes   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). Copy 2011 taxes This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Copy 2011 taxes Debt over this limit may qualify as home equity debt (also discussed later). Copy 2011 taxes Refinanced home acquisition debt. Copy 2011 taxes   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Copy 2011 taxes 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. Copy 2011 taxes 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). Copy 2011 taxes Mortgage that qualifies later. Copy 2011 taxes   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Copy 2011 taxes 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. Copy 2011 taxes However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Copy 2011 taxes Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Copy 2011 taxes However, if the property later becomes a qualified home, the debt may qualify after that time. Copy 2011 taxes Mortgage treated as used to buy, build, or improve home. Copy 2011 taxes   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. Copy 2011 taxes This applies in the following situations. Copy 2011 taxes You buy your home within 90 days before or after the date you take out the mortgage. Copy 2011 taxes 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). Copy 2011 taxes (See Example 1 later. Copy 2011 taxes ) You build or improve your home and take out the mortgage before the work is completed. Copy 2011 taxes The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Copy 2011 taxes You build or improve your home and take out the mortgage within 90 days after the work is completed. Copy 2011 taxes 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. Copy 2011 taxes (See Example 2 later. Copy 2011 taxes ) Example 1. Copy 2011 taxes You bought your main home on June 3 for $175,000. Copy 2011 taxes You paid for the home with cash you got from the sale of your old home. Copy 2011 taxes On July 15, you took out a mortgage of $150,000 secured by your main home. Copy 2011 taxes You used the $150,000 to invest in stocks. Copy 2011 taxes 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. Copy 2011 taxes The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Copy 2011 taxes Example 2. Copy 2011 taxes On January 31, John began building a home on the lot that he owned. Copy 2011 taxes He used $45,000 of his personal funds to build the home. Copy 2011 taxes The home was completed on October 31. Copy 2011 taxes On November 21, John took out a $36,000 mortgage that was secured by the home. Copy 2011 taxes The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Copy 2011 taxes 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. Copy 2011 taxes This is illustrated by Figure C. Copy 2011 taxes   Please click here for the text description of the image. Copy 2011 taxes Figure C. Copy 2011 taxes John's example Date of the mortgage. Copy 2011 taxes   The date you take out your mortgage is the day the loan proceeds are disbursed. Copy 2011 taxes This is generally the closing date. Copy 2011 taxes You can treat the day you apply in writing for your mortgage as the date you take it out. Copy 2011 taxes However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Copy 2011 taxes If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Copy 2011 taxes Cost of home or improvements. Copy 2011 taxes   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Copy 2011 taxes   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. Copy 2011 taxes Substantial improvement. Copy 2011 taxes   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. Copy 2011 taxes    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Copy 2011 taxes 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. Copy 2011 taxes Acquiring an interest in a home because of a divorce. Copy 2011 taxes   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. Copy 2011 taxes Part of home not a qualified home. Copy 2011 taxes    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. Copy 2011 taxes See Divided use of your home under Qualified Home in Part I. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Example. Copy 2011 taxes You bought your home for cash 10 years ago. Copy 2011 taxes 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. Copy 2011 taxes This loan is home equity debt. Copy 2011 taxes Home equity debt limit. Copy 2011 taxes   There is a limit on the amount of debt that can be treated as home equity debt. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Example. Copy 2011 taxes You own one home that you bought in 2000. Copy 2011 taxes Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Copy 2011 taxes Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Copy 2011 taxes To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Copy 2011 taxes Your home equity debt is limited to $15,000. Copy 2011 taxes 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. Copy 2011 taxes Debt higher than limit. Copy 2011 taxes   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. Copy 2011 taxes But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Copy 2011 taxes If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Copy 2011 taxes Part of home not a qualified home. Copy 2011 taxes   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. Copy 2011 taxes See Divided use of your home under Qualified Home in Part I. Copy 2011 taxes Fair market value (FMV). Copy 2011 taxes    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. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Copy 2011 taxes How you used the proceeds does not matter. Copy 2011 taxes Grandfathered debt is not limited. Copy 2011 taxes All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Copy 2011 taxes 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. Copy 2011 taxes Refinanced grandfathered debt. Copy 2011 taxes   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. Copy 2011 taxes 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). Copy 2011 taxes The debt must be secured by the qualified home. Copy 2011 taxes   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. Copy 2011 taxes After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Copy 2011 taxes Exception. Copy 2011 taxes   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. Copy 2011 taxes This term cannot be more than 30 years. Copy 2011 taxes Example. Copy 2011 taxes Chester took out a $200,000 first mortgage on his home in 1986. Copy 2011 taxes The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Copy 2011 taxes Chester refinanced the debt in 1991 with a new 20-year mortgage. Copy 2011 taxes The refinanced debt is treated as grandfathered debt for its entire term (20 years). Copy 2011 taxes Line-of-credit mortgage. Copy 2011 taxes    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. Copy 2011 taxes The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Copy 2011 taxes The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Copy 2011 taxes See Average Mortgage Balance in the Table 1 Instructions that follow. Copy 2011 taxes 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. Copy 2011 taxes All the mortgages are grandfathered debt. Copy 2011 taxes The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Copy 2011 taxes In either of those cases, you do not need Table 1. Copy 2011 taxes Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Copy 2011 taxes Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Copy 2011 taxes Table 1. Copy 2011 taxes Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Copy 2011 taxes Part I Qualified Loan Limit 1. Copy 2011 taxes Enter the average balance of all your grandfathered debt. Copy 2011 taxes See line 1 instructions 1. Copy 2011 taxes   2. Copy 2011 taxes Enter the average balance of all your home acquisition debt. Copy 2011 taxes See line 2 instructions 2. Copy 2011 taxes   3. Copy 2011 taxes Enter $1,000,000 ($500,000 if married filing separately) 3. Copy 2011 taxes   4. Copy 2011 taxes Enter the larger of the amount on line 1 or the amount on line 3 4. Copy 2011 taxes   5. Copy 2011 taxes Add the amounts on lines 1 and 2. Copy 2011 taxes Enter the total here 5. Copy 2011 taxes   6. Copy 2011 taxes Enter the smaller of the amount on line 4 or the amount on line 5 6. Copy 2011 taxes   7. Copy 2011 taxes If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Copy 2011 taxes See the line 7 instructions for the limit which may apply to you. Copy 2011 taxes 7. Copy 2011 taxes   8. Copy 2011 taxes Add the amounts on lines 6 and 7. Copy 2011 taxes Enter the total. Copy 2011 taxes This is your qualified loan limit. Copy 2011 taxes 8. Copy 2011 taxes   Part II Deductible Home Mortgage Interest 9. Copy 2011 taxes Enter the total of the average balances of all mortgages on all qualified homes. Copy 2011 taxes  See line 9 instructions 9. Copy 2011 taxes     If line 8 is less than line 9, go on to line 10. Copy 2011 taxes If line 8 is equal to or more than line 9, stop here. Copy 2011 taxes All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Copy 2011 taxes     10. Copy 2011 taxes Enter the total amount of interest that you paid. Copy 2011 taxes See line 10 instructions 10. Copy 2011 taxes   11. Copy 2011 taxes Divide the amount on line 8 by the amount on line 9. Copy 2011 taxes Enter the result as a decimal amount (rounded to three places) 11. Copy 2011 taxes × . Copy 2011 taxes 12. Copy 2011 taxes Multiply the amount on line 10 by the decimal amount on line 11. Copy 2011 taxes Enter the result. Copy 2011 taxes This is your deductible home mortgage interest. Copy 2011 taxes Enter this amount on Schedule A (Form 1040) 12. Copy 2011 taxes   13. Copy 2011 taxes Subtract the amount on line 12 from the amount on line 10. Copy 2011 taxes Enter the result. Copy 2011 taxes This is not home mortgage interest. Copy 2011 taxes See line 13 instructions 13. Copy 2011 taxes   Home equity debt only. Copy 2011 taxes   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Copy 2011 taxes Enter zero on line 6 and complete the rest of Table 1. Copy 2011 taxes Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Copy 2011 taxes You need these amounts to complete lines 1, 2, and 9 of Table 1. Copy 2011 taxes You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Copy 2011 taxes The following are methods you can use to figure your average mortgage balances. Copy 2011 taxes However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Copy 2011 taxes Average of first and last balance method. Copy 2011 taxes   You can use this method if all the following apply. Copy 2011 taxes You did not borrow any new amounts on the mortgage during the year. Copy 2011 taxes (This does not include borrowing the original mortgage amount. Copy 2011 taxes ) You did not prepay more than one month's principal during the year. Copy 2011 taxes (This includes prepayment by refinancing your home or by applying proceeds from its sale. Copy 2011 taxes ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Copy 2011 taxes You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Copy 2011 taxes    To figure your average balance, complete the following worksheet. Copy 2011 taxes    1. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Add amounts on lines 1 and 2   4. Copy 2011 taxes Divide the amount on line 3 by 2. Copy 2011 taxes Enter the result   Interest paid divided by interest rate method. Copy 2011 taxes   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. Copy 2011 taxes    Complete the following worksheet to figure your average balance. Copy 2011 taxes    1. Copy 2011 taxes Enter the interest paid in 2013. Copy 2011 taxes Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Copy 2011 taxes However, do include interest that is for 2013 but was paid in an earlier year   2. Copy 2011 taxes Enter the annual interest rate on the mortgage. Copy 2011 taxes If the interest rate varied in 2013, use the lowest rate for the year   3. Copy 2011 taxes Divide the amount on line 1 by the amount on line 2. Copy 2011 taxes Enter the result   Example. Copy 2011 taxes Mr. Copy 2011 taxes Blue had a line of credit secured by his main home all year. Copy 2011 taxes He paid interest of $2,500 on this loan. Copy 2011 taxes The interest rate on the loan was 9% (. Copy 2011 taxes 09) all year. Copy 2011 taxes His average balance using this method is $27,778, figured as follows. Copy 2011 taxes 1. Copy 2011 taxes Enter the interest paid in 2013. Copy 2011 taxes Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Copy 2011 taxes However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Copy 2011 taxes Enter the annual interest rate on the mortgage. Copy 2011 taxes If the interest rate varied in 2013, use the lowest rate for the year . Copy 2011 taxes 09 3. Copy 2011 taxes Divide the amount on line 1 by the amount on line 2. Copy 2011 taxes Enter the result $27,778 Statements provided by your lender. Copy 2011 taxes   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. Copy 2011 taxes You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Copy 2011 taxes   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. Copy 2011 taxes   If your lender can give you your average balance for the year, you can use that amount. Copy 2011 taxes Example. Copy 2011 taxes Ms. Copy 2011 taxes Brown had a home equity loan secured by her main home all year. Copy 2011 taxes She received monthly statements showing her average balance for each month. Copy 2011 taxes She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Copy 2011 taxes Mixed-use mortgages. Copy 2011 taxes   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). Copy 2011 taxes 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). Copy 2011 taxes   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. Copy 2011 taxes Do not use the methods described earlier in this section to figure the average balance of either category. Copy 2011 taxes Instead, for each category, use the following method. Copy 2011 taxes Figure the balance of that category of debt for each month. Copy 2011 taxes 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. Copy 2011 taxes 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. Copy 2011 taxes Add together the monthly balances figured in (1). Copy 2011 taxes Divide the result in (2) by 12. Copy 2011 taxes   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. Copy 2011 taxes Example 1. Copy 2011 taxes In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Copy 2011 taxes 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. Copy 2011 taxes 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). Copy 2011 taxes Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Copy 2011 taxes During 2013, her principal payments on the second mortgage totaled $10,000. Copy 2011 taxes 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. Copy 2011 taxes The January and February balances were zero. Copy 2011 taxes The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Copy 2011 taxes (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Copy 2011 taxes ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Copy 2011 taxes Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Copy 2011 taxes Example 2. Copy 2011 taxes The facts are the same as in Example 1. Copy 2011 taxes In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Copy 2011 taxes The balance of the home acquisition debt remains $180,000 for each of those months. Copy 2011 taxes 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). Copy 2011 taxes The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Copy 2011 taxes Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Copy 2011 taxes L