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Hr Block Free File

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Hr Block Free File

Hr block free file 15. Hr block free file   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Hr block free file More information. Hr block free file Special SituationsException for sales to related persons. Hr block free file Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. Hr block free file  If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. Hr block free file See Mortgage ending early under Points in chapter 23. Hr block free file Introduction This chapter explains the tax rules that apply when you sell your main home. Hr block free file In most cases, your main home is the one in which you live most of the time. Hr block free file If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). Hr block free file See Excluding the Gain , later. Hr block free file Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Hr block free file If you have gain that cannot be excluded, it is taxable. Hr block free file Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). Hr block free file You may also have to complete Form 4797, Sales of Business Property. Hr block free file See Reporting the Sale , later. Hr block free file If you have a loss on the sale, you generally cannot deduct it on your return. Hr block free file However, you may need to report it. Hr block free file See Reporting the Sale , later. Hr block free file The following are main topics in this chapter. Hr block free file Figuring gain or loss. Hr block free file Basis. Hr block free file Excluding the gain. Hr block free file Ownership and use tests. Hr block free file Reporting the sale. Hr block free file Other topics include the following. Hr block free file Business use or rental of home. Hr block free file Recapturing a federal mortgage subsidy. Hr block free file Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. Hr block free file ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Hr block free file To exclude gain under the rules of this chapter, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Hr block free file Land. Hr block free file   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Hr block free file However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. Hr block free file See Vacant land under Main Home in Publication 523 for more information. Hr block free file Example. Hr block free file You buy a piece of land and move your main home to it. Hr block free file Then you sell the land on which your main home was located. Hr block free file This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Hr block free file More than one home. Hr block free file   If you have more than one home, you can exclude gain only from the sale of your main home. Hr block free file You must include in income gain from the sale of any other home. Hr block free file If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year. Hr block free file Example 1. Hr block free file You own two homes, one in New York and one in Florida. Hr block free file From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Hr block free file In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Hr block free file You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Hr block free file Example 2. Hr block free file You own a house, but you live in another house that you rent. Hr block free file The rented house is your main home. Hr block free file Example 3. Hr block free file You own two homes, one in Virginia and one in New Hampshire. Hr block free file In 2009 and 2010, you lived in the Virginia home. Hr block free file In 2011 and 2012, you lived in the New Hampshire home. Hr block free file In 2013, you lived again in the Virginia home. Hr block free file Your main home in 2009, 2010, and 2013 is the Virginia home. Hr block free file Your main home in 2011 and 2012 is the New Hampshire home. Hr block free file You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Hr block free file Property used partly as your main home. Hr block free file   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Hr block free file For details, see Business Use or Rental of Home , later. Hr block free file Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Hr block free file Subtract the adjusted basis from the amount realized to get your gain or loss. Hr block free file     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. Hr block free file It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Hr block free file Payment by employer. Hr block free file   You may have to sell your home because of a job transfer. Hr block free file If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Hr block free file Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7. Hr block free file Option to buy. Hr block free file   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Hr block free file If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Hr block free file Report this amount on Form 1040, line 21. Hr block free file Form 1099-S. Hr block free file   If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home. Hr block free file   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Hr block free file Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Hr block free file Amount Realized The amount realized is the selling price minus selling expenses. Hr block free file Selling expenses. Hr block free file   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Hr block free file ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Hr block free file This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Hr block free file For information on how to figure your home's adjusted basis, see Determining Basis , later. Hr block free file Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Hr block free file Gain on sale. Hr block free file   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. Hr block free file Loss on sale. Hr block free file   If the amount realized is less than the adjusted basis, the difference is a loss. Hr block free file A loss on the sale of your main home cannot be deducted. Hr block free file Jointly owned home. Hr block free file   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Hr block free file Separate returns. Hr block free file   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Hr block free file Your ownership interest is generally determined by state law. Hr block free file Joint owners not married. Hr block free file   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Hr block free file Each of you applies the rules discussed in this chapter on an individual basis. Hr block free file Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Hr block free file Foreclosure or repossession. Hr block free file   If your home was foreclosed on or repossessed, you have a disposition. Hr block free file See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. Hr block free file Abandonment. Hr block free file   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Hr block free file Trading (exchanging) homes. Hr block free file   If you trade your old home for another home, treat the trade as a sale and a purchase. Hr block free file Example. Hr block free file You owned and lived in a home with an adjusted basis of $41,000. Hr block free file A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Hr block free file This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). Hr block free file If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Hr block free file Transfer to spouse. Hr block free file   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. Hr block free file This is true even if you receive cash or other consideration for the home. Hr block free file As a result, the rules in this chapter do not apply. Hr block free file More information. Hr block free file   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. Hr block free file Involuntary conversion. Hr block free file   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Hr block free file This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations . Hr block free file Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Hr block free file Your basis in your home is determined by how you got the home. Hr block free file Generally, your basis is its cost if you bought it or built it. Hr block free file If you got it in some other way (inheritance, gift, etc. Hr block free file ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Hr block free file While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Hr block free file The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Hr block free file See Adjusted Basis , later. Hr block free file You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. Hr block free file Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Hr block free file Purchase. Hr block free file   If you bought your home, your basis is its cost to you. Hr block free file This includes the purchase price and certain settlement or closing costs. Hr block free file In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Hr block free file If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. Hr block free file Settlement fees or closing costs. Hr block free file   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Hr block free file You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Hr block free file A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Hr block free file    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. Hr block free file It also lists some settlement costs that cannot be included in basis. Hr block free file   Also see Publication 523 for additional items and a discussion of basis other than cost. Hr block free file Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Hr block free file To figure your adjusted basis, you can use Worksheet 1 in Publication 523. Hr block free file Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Hr block free file Increases to basis. Hr block free file   These include the following. Hr block free file Additions and other improvements that have a useful life of more than 1 year. Hr block free file Special assessments for local improvements. Hr block free file Amounts you spent after a casualty to restore damaged property. Hr block free file Improvements. Hr block free file   These add to the value of your home, prolong its useful life, or adapt it to new uses. Hr block free file You add the cost of additions and other improvements to the basis of your property. Hr block free file   For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. Hr block free file An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. Hr block free file Repairs. Hr block free file   These maintain your home in good condition but do not add to its value or prolong its life. Hr block free file You do not add their cost to the basis of your property. Hr block free file   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. Hr block free file Decreases to basis. Hr block free file   These include the following. Hr block free file Discharge of qualified principal residence indebtedness that was excluded from income. Hr block free file Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Hr block free file For details, see Publication 4681. Hr block free file Gain you postponed from the sale of a previous home before May 7, 1997. Hr block free file Deductible casualty losses. Hr block free file Insurance payments you received or expect to receive for casualty losses. Hr block free file Payments you received for granting an easement or right-of-way. Hr block free file Depreciation allowed or allowable if you used your home for business or rental purposes. Hr block free file Energy-related credits allowed for expenditures made on the residence. Hr block free file (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Hr block free file ) Adoption credit you claimed for improvements added to the basis of your home. Hr block free file Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Hr block free file Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Hr block free file An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Hr block free file District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). Hr block free file General sales taxes (allowed beginning 2004 and ending before 2014) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Hr block free file Discharges of qualified principal residence indebtedness. Hr block free file   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Hr block free file This exclusion applies to discharges made after 2006 and before 2014. Hr block free file If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. Hr block free file   File Form 982 with your tax return. Hr block free file See the form's instructions for detailed information. Hr block free file Recordkeeping. Hr block free file You should keep records to prove your home's adjusted basis. Hr block free file Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Hr block free file But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Hr block free file Keep records proving the basis of both homes as long as they are needed for tax purposes. Hr block free file The records you should keep include: Proof of the home's purchase price and purchase expenses, Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis, Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain, Any Form 982 you filed to report any discharge of qualified principal residence indebtedness, Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997, and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Hr block free file Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Hr block free file This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Hr block free file To qualify, you must meet the ownership and use tests described later. Hr block free file You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Hr block free file You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. Hr block free file If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Hr block free file See Publication 505, Tax Withholding and Estimated Tax. Hr block free file Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Hr block free file You meet the ownership test. Hr block free file You meet the use test. Hr block free file During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Hr block free file For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. Hr block free file You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Hr block free file Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Hr block free file This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Hr block free file Exception. Hr block free file   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Hr block free file However, the maximum amount you may be able to exclude will be reduced. Hr block free file See Reduced Maximum Exclusion , later. Hr block free file Example 1—home owned and occupied for at least 2 years. Hr block free file Mya bought and moved into her main home in September 2011. Hr block free file She sold the home at a gain in October 2013. Hr block free file During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Hr block free file She meets the ownership and use tests. Hr block free file Example 2—ownership test met but use test not met. Hr block free file Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Hr block free file He later sold the home for a gain. Hr block free file He owned the home during the entire 5-year period ending on the date of sale. Hr block free file He meets the ownership test but not the use test. Hr block free file He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Hr block free file Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Hr block free file You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Hr block free file Temporary absence. Hr block free file   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Hr block free file The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Hr block free file Example 1. Hr block free file David Johnson, who is single, bought and moved into his home on February 1, 2011. Hr block free file Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Hr block free file David sold the house on March 1, 2013. Hr block free file Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. Hr block free file The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Hr block free file Example 2. Hr block free file Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. Hr block free file He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. Hr block free file On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. Hr block free file Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Hr block free file He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. Hr block free file Ownership and use tests met at different times. Hr block free file   You can meet the ownership and use tests during different 2-year periods. Hr block free file However, you must meet both tests during the 5-year period ending on the date of the sale. Hr block free file Example. Hr block free file Beginning in 2002, Helen Jones lived in a rented apartment. Hr block free file The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Hr block free file In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Hr block free file On July 12, 2013, while still living in her daughter's home, she sold her condominium. Hr block free file Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Hr block free file She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Hr block free file She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Hr block free file The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Hr block free file Cooperative apartment. Hr block free file   If you sold stock as a tenant-stockholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years. Hr block free file Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Hr block free file Exception for individuals with a disability. Hr block free file   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Hr block free file Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Hr block free file If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Hr block free file Previous home destroyed or condemned. Hr block free file   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Hr block free file This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Hr block free file Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Hr block free file Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Hr block free file   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Hr block free file You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on "qualified official extended duty" or as an enrolled volunteer or volunteer leader of the Peace Corps. Hr block free file This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Hr block free file   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Hr block free file For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. Hr block free file Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Hr block free file (But see Special rules for joint returns , next. Hr block free file ) Special rules for joint returns. Hr block free file   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Hr block free file You are married and file a joint return for the year. Hr block free file Either you or your spouse meets the ownership test. Hr block free file Both you and your spouse meet the use test. Hr block free file During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Hr block free file If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Hr block free file For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Hr block free file Example 1—one spouse sells a home. Hr block free file Emily sells her home in June 2013 for a gain of $300,000. Hr block free file She marries Jamie later in the year. Hr block free file She meets the ownership and use tests, but Jamie does not. Hr block free file Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Hr block free file The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Hr block free file Example 2—each spouse sells a home. Hr block free file The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Hr block free file He meets the ownership and use tests on his home, but Emily does not. Hr block free file Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Hr block free file However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Hr block free file Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Hr block free file The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Hr block free file Sale of main home by surviving spouse. Hr block free file   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Hr block free file   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Hr block free file The sale or exchange took place after 2008. Hr block free file The sale or exchange took place no more than 2 years after the date of death of your spouse. Hr block free file You have not remarried. Hr block free file You and your spouse met the use test at the time of your spouse's death. Hr block free file You or your spouse met the ownership test at the time of your spouse's death. Hr block free file Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Hr block free file Example. Hr block free file   Harry owned and used a house as his main home since 2009. Hr block free file Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. Hr block free file Harry died on August 15, 2013, and Wilma inherited the property. Hr block free file Wilma sold the property on September 3, 2013, at which time she had not remarried. Hr block free file Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Hr block free file Home transferred from spouse. Hr block free file   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Hr block free file Use of home after divorce. Hr block free file   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Hr block free file Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Hr block free file This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Hr block free file In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Hr block free file A change in place of employment. Hr block free file Health. Hr block free file Unforeseen circumstances. Hr block free file Unforeseen circumstances. Hr block free file   The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. Hr block free file   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. Hr block free file Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. Hr block free file But you must meet the ownership and use tests. Hr block free file Periods of nonqualified use. Hr block free file   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Hr block free file Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. Hr block free file Exceptions. Hr block free file   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Hr block free file The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Hr block free file Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Hr block free file Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. Hr block free file Calculation. Hr block free file   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:   Total nonqualified use during the period of ownership after 2008      Total period of ownership     This calculation can be found in Worksheet 2, line 10, in Publication 523. Hr block free file Example 1. Hr block free file On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Hr block free file She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Hr block free file The house was rented from June 1, 2009, to March 31, 2011. Hr block free file Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Hr block free file Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Hr block free file During the 5-year period ending on the date of the sale (January 31, 2008-January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Hr block free file Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 1/31/13 22 months         38 months 22 months During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Hr block free file Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. Hr block free file 321. Hr block free file To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. Hr block free file 321. Hr block free file Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. Hr block free file Example 2. Hr block free file William owned and used a house as his main home from 2007 through 2010. Hr block free file On January 1, 2011, he moved to another state. Hr block free file He rented his house from that date until April 30, 2013, when he sold it. Hr block free file During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Hr block free file He must report the sale on Form 4797 because it was rental property at the time of sale. Hr block free file Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Hr block free file Because he met the ownership and use tests, he can exclude gain up to $250,000. Hr block free file However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Hr block free file Depreciation after May 6, 1997. Hr block free file   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Hr block free file If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Hr block free file See Publication 544 for more information. Hr block free file Property used partly for business or rental. Hr block free file   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. Hr block free file Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. Hr block free file If any of these conditions apply, report the entire gain or loss. Hr block free file For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. Hr block free file If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). Hr block free file See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. Hr block free file Installment sale. Hr block free file    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. Hr block free file These sales are called “installment sales. Hr block free file ” If you finance the buyer's purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. Hr block free file You may be able to report the part of the gain you cannot exclude on the installment basis. Hr block free file    Use Form 6252, Installment Sale Income, to report the sale. Hr block free file Enter your exclusion on line 15 of Form 6252. Hr block free file Seller-financed mortgage. Hr block free file   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. Hr block free file You must separately report as interest income the interest you receive as part of each payment. Hr block free file If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). Hr block free file The buyer must give you his or her SSN, and you must give the buyer your SSN. Hr block free file Failure to meet these requirements may result in a $50 penalty for each failure. Hr block free file If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. Hr block free file More information. Hr block free file   For more information on installment sales, see Publication 537, Installment Sales. Hr block free file Special Situations The situations that follow may affect your exclusion. Hr block free file Sale of home acquired in a like-kind exchange. Hr block free file   You cannot claim the exclusion if: You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange. Hr block free file Gain from a like-kind exchange is not taxable at the time of the exchange. Hr block free file This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. Hr block free file To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. Hr block free file For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. Hr block free file Home relinquished in a like-kind exchange. Hr block free file   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. Hr block free file Expatriates. Hr block free file   You cannot claim the exclusion if the expatriation tax applies to you. Hr block free file The expatriation tax applies to certain U. Hr block free file S. Hr block free file citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). Hr block free file For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. Hr block free file S. Hr block free file Tax Guide for Aliens. Hr block free file Home destroyed or condemned. Hr block free file   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. Hr block free file   Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in: Publication 547, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. Hr block free file Sale of remainder interest. Hr block free file   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. Hr block free file If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately. Hr block free file Exception for sales to related persons. Hr block free file   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Hr block free file Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Hr block free file ), and lineal descendants (children, grandchildren, etc. Hr block free file ). Hr block free file Related persons also include certain corporations, partnerships, trusts, and exempt organizations. Hr block free file Recapturing (Paying Back) a Federal Mortgage Subsidy If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Hr block free file You recapture the benefit by increasing your federal income tax for the year of the sale. Hr block free file You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. Hr block free file Loans subject to recapture rules. Hr block free file   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. Hr block free file The recapture also applies to assumptions of these loans. Hr block free file When recapture applies. Hr block free file   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. Hr block free file You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. Hr block free file Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program). Hr block free file When recapture does not apply. Hr block free file   Recapture does not apply in any of the following situations. Hr block free file Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. Hr block free file Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. Hr block free file For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Hr block free file Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Hr block free file The home is disposed of as a result of your death. Hr block free file You dispose of the home more than 9 years after the date you closed your mortgage loan. Hr block free file You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. Hr block free file You dispose of the home at a loss. Hr block free file Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. Hr block free file The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. Hr block free file For more information, see Replacement Period in Publication 547. Hr block free file You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). Hr block free file Notice of amounts. Hr block free file   At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. Hr block free file How to figure and report the recapture. Hr block free file    The recapture tax is figured on Form 8828. Hr block free file If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture tax. Hr block free file Attach Form 8828 to your Form 1040. Hr block free file For more information, see Form 8828 and its instructions. Hr block free file Prev  Up  Next   Home   More Online Publications
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Disaster Assistance and Emergency Relief for Individuals and Businesses

Overview

Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. Depending on the circumstances, the IRS may grant additional time to file returns and pay taxes. Both individuals and businesses in a federally declared disaster area can get a faster refund by claiming losses related to the disaster on the tax return for the previous year, usually by filing an amended return.

The IRS also offers audio presentations on Planning for Disaster. These presentations discuss business continuity planning, insurance coverage, recording keeping and other tips to stay in business after a major disaster.

Get the Latest Tax Relief Guidance in Disaster Situations
Recent special tax law provisions may help taxpayers recover financially from the impact of a major disaster in their location.

Preparing for Disasters
Are your home and/or business ready if a disaster strikes? Get information and suggestions on paperless recordkeeping, documenting assets and valuables, and emergency planning.

Help for Disaster Victims
This podcast provides information on what to do and who to contact if you have been affected by a disaster this year.

Help During Disasters
We know that major disasters and emergencies in your area will affect many families and businesses. While we hope you are spared any loss, we realize this may not be true for everyone, and we want to let you know how the IRS can help.

Around the Nation
This section of our Web site provides IRS news specific to local areas, primarily disaster relief or tax provisions that affect certain states.

Tax Topic 515 - Casualty, Disaster, and Theft Losses
Casualty losses can result from the destruction of or damage to your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.

Disaster Assistance Self-Study
The Disaster Assistance Self-Study provides the basic information needed to assist taxpayers in a disaster. It provides the volunteer practitioner disaster representative member with information on distributing Disaster Kits, computing gains/losses as the result of a disaster, information about administrative tax relief and information about the psychological effects of a disaster on its victims.

For Individuals

FAQs for Disaster Victims
This section provides current information on disaster relief and frequently asked questions. The Hurricane Katrina FAQs are now listed separately from the general FAQs, which are applicable to any disaster.

Gulf Oil Spill: Questions and Answers
The existing law dictates whether payments received from BP for losses, damage and injuries are taxable. Refer to the Gulf Oil Spill technical questions and answers for more information.

Reconstructing Your Records
Reconstructing records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. Records that you need to prove your loss may have been damaged or destroyed in a casualty. While it may not be easy, reconstructing your records may be essential.

Publication 2194, Disaster Resource Guide for Individuals and Businesses (PDF)
Publication 2194 is a Disaster Losses Kit to help individuals claim casualty losses on property that was destroyed by a natural disaster. The kit contains tax forms needed to claim a casualty loss. It also answers common questions like how to extend the time you need to file, how you can receive free tax services and how to identify which disaster losses to claim.

Help for Hurricane Victims: Information on Tax Relief, Charitable Issues
The Internal Revenue Service is working to provide appropriate relief and assistance to victims of Hurricanes Katrina, Rita and Wilma.

For Businesses

Publication 2194, Disaster Resource Guide for Individuals and Businesses (PDF)
Publication 2194 is a Disaster Losses Kit to help businesses claim casualty losses on property that has been destroyed by a natural disaster. The kit contains tax forms needed to claim a casualty loss.

Crop Insurance and Crop Disaster Payments - Agriculture Tax Tips
This section offers helpful tax tips including whether crop insurance and crop disaster payments are taxable.

Disaster Planning Video Presentations:

For Tax Professionals

Disaster Relief Resource Center for Tax Professionals
Through this resource center we address many of the questions received from tax professionals. We've included information published by the IRS, along with links to IRS partners who may offer additional assistance. Many of our partners have developed Web pages that highlight the efforts they've made to help their fellow practitioners to recover and get re-established.

For Charitable Organizations

Disaster Relief - Resources for Charities and Contributors
After a disaster or in another emergency hardship situation, people may be interested in using a charitable organization to help victims. The IRS provides a number of resources to help them accomplish this goal.

Publication 3833, Disaster Relief, Providing Assistance Through Charitable Organizations (PDF)
This publication describes how members of the public can use charitable organizations to provide assistance to victims of disasters or other emergency hardship situations.

Talk With the IRS

Contact My Local Office
IRS Taxpayer Assistance Centers are your one-stop resource for face-to-face tax help and solutions to tax problems, every business day.

Taxpayer Advocate Service
The Taxpayer Advocate is an independent organization within the IRS. They help taxpayers resolve problems with the IRS and recommend changes that will prevent the problems.

Other Government Agency Disaster Information

DisasterAssistance.gov
This is a one stop web portal that consolidates information from 17 US Government Agencies where taxpayers can apply for Small Business Administration loans through online applications, receive referral information on forms of assistance that do not have online applications, or check the progress and status of their applications online.

Federal Emergency Management Agency (FEMA)
Federal disaster aid programs provided by the Federal Emergency Management Agency (FEMA) are available to citizens affected by major disasters.

Small Business Administration (SBA)
The U. S. Small Business Administration (SBA) is responsible for providing affordable, timely and accessible financial assistance to homeowners, renters and businesses of all sizes located in a declared disaster area. Financial assistance is available in the form of low-interest, long-term loans for losses that are not fully covered by insurance or other recoveries.

READY.gov
Learn how individuals and business can prepare for and respond to all kinds of disasters and emergencies.

GovBenefits.gov
GovBenefits.gov wants to let survivors and disaster relief workers know about the many disaster relief programs available. Perhaps you have suffered damage to a home or business, lost your job, or experienced crop damage due to a natural disaster. GovBenefits.gov has a variety of national benefit and assistance programs geared toward disaster recovery

IRS Forms and Publications

Publication 547 – Casualties, Disasters and Thefts
Publication 547 explains how to treat casualties, thefts, and losses on deposits. It discusses definitions, how to figure gain or loss, how to treat reimbursements, and how to report them.

Form 1040X (PDF).

Publication 584 (PDF). Also available in HTML.

Publication 584B (PDF). Also available in HTML.

Publication 2194 (PDF).

Publication 3067 (EN/SP) (PDF).

Publication 3067 (EN/CN) (PDF)

Publication 3067 (EN/DE) (PDF)

Publication 3067 (EN/KR) (PDF)

Publication 3067 (EN/RU) (PDF)

Publication 3067 (EN/VN) (PDF)

Publication 3833 (PDF).

Page Last Reviewed or Updated: 21-Jan-2014

The Hr Block Free File

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