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Hr Block Tax Return

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Hr Block Tax Return

Hr block tax return Publication 936 - Main Content Table of Contents Part I. Hr block tax return Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. Hr block tax return Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. Hr block tax return Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Hr block tax return It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Hr block tax return Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Hr block tax return The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Hr block tax return You can deduct home mortgage interest if all the following conditions are met. Hr block tax return You file Form 1040 and itemize deductions on Schedule A (Form 1040). Hr block tax return The mortgage is a secured debt on a qualified home in which you have an ownership interest. Hr block tax return Secured Debt and Qualified Home are explained later. Hr block tax return  Both you and the lender must intend that the loan be repaid. Hr block tax return Fully deductible interest. Hr block tax return   In most cases, you can deduct all of your home mortgage interest. Hr block tax return How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Hr block tax return   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Hr block tax return (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Hr block tax return ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. Hr block tax return   The three categories are as follows. Hr block tax return Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Hr block tax return Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Hr block tax return Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Hr block tax return The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Hr block tax return   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Hr block tax return    You can use Figure A to check whether your home mortgage interest is fully deductible. Hr block tax return This image is too large to be displayed in the current screen. Hr block tax return Please click the link to view the image. Hr block tax return Figure A. Hr block tax return Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Hr block tax return A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. Hr block tax return In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Hr block tax return If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Hr block tax return In this publication, mortgage will refer to secured debt. Hr block tax return Debt not secured by home. Hr block tax return   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). Hr block tax return   A debt is not secured by your home if it once was, but is no longer secured by your home. Hr block tax return Wraparound mortgage. Hr block tax return   This is not a secured debt unless it is recorded or otherwise perfected under state law. Hr block tax return Example. Hr block tax return Beth owns a home subject to a mortgage of $40,000. Hr block tax return She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Hr block tax return Beth continues to make the payments on the $40,000 note. Hr block tax return John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Hr block tax return Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Hr block tax return Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Hr block tax return Choice to treat the debt as not secured by your home. Hr block tax return   You can choose to treat any debt secured by your qualified home as not secured by the home. Hr block tax return This treatment begins with the tax year for which you make the choice and continues for all later tax years. Hr block tax return You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Hr block tax return   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. Hr block tax return This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Hr block tax return Cooperative apartment owner. Hr block tax return   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. Hr block tax return Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Hr block tax return This means your main home or your second home. Hr block tax return A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Hr block tax return The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Hr block tax return Otherwise, it is considered personal interest and is not deductible. Hr block tax return Main home. Hr block tax return   You can have only one main home at any one time. Hr block tax return This is the home where you ordinarily live most of the time. Hr block tax return Second home. Hr block tax return   A second home is a home that you choose to treat as your second home. Hr block tax return Second home not rented out. Hr block tax return   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. Hr block tax return You do not have to use the home during the year. Hr block tax return Second home rented out. Hr block tax return   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. Hr block tax return You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. Hr block tax return If you do not use the home long enough, it is considered rental property and not a second home. Hr block tax return For information on residential rental property, see Publication 527. Hr block tax return More than one second home. Hr block tax return   If you have more than one second home, you can treat only one as the qualified second home during any year. Hr block tax return However, you can change the home you treat as a second home during the year in the following situations. Hr block tax return If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. Hr block tax return If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. Hr block tax return If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. Hr block tax return Divided use of your home. Hr block tax return   The only part of your home that is considered a qualified home is the part you use for residential living. Hr block tax return If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. Hr block tax return You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Hr block tax return Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. Hr block tax return (See Home Acquisition Debt in Part II. Hr block tax return ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Hr block tax return Renting out part of home. Hr block tax return   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. Hr block tax return The rented part of your home is used by the tenant primarily for residential living. Hr block tax return The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Hr block tax return You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. Hr block tax return If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Hr block tax return Office in home. Hr block tax return   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Hr block tax return It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Hr block tax return Home under construction. Hr block tax return   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. Hr block tax return   The 24-month period can start any time on or after the day construction begins. Hr block tax return Home destroyed. Hr block tax return   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. Hr block tax return This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Hr block tax return   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. Hr block tax return   This rule applies to your main home and to a second home that you treat as a qualified home. Hr block tax return Time-sharing arrangements. Hr block tax return   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Hr block tax return A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. Hr block tax return Rental of time-share. Hr block tax return   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. Hr block tax return See Second home rented out , earlier, for the use requirement. Hr block tax return To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. Hr block tax return Married taxpayers. Hr block tax return   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Hr block tax return Separate returns. Hr block tax return   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. Hr block tax return However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Hr block tax return Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Hr block tax return It also describes certain special situations that may affect your deduction. Hr block tax return Late payment charge on mortgage payment. Hr block tax return   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Hr block tax return Mortgage prepayment penalty. Hr block tax return   If you pay off your home mortgage early, you may have to pay a penalty. Hr block tax return You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Hr block tax return Sale of home. Hr block tax return   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. Hr block tax return Example. Hr block tax return John and Peggy Harris sold their home on May 7. Hr block tax return Through April 30, they made home mortgage interest payments of $1,220. Hr block tax return The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Hr block tax return Their mortgage interest deduction is $1,270 ($1,220 + $50). Hr block tax return Prepaid interest. Hr block tax return   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Hr block tax return You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Hr block tax return However, there is an exception that applies to points, discussed later. Hr block tax return Mortgage interest credit. Hr block tax return    You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Hr block tax return Figure the credit on Form 8396, Mortgage Interest Credit. Hr block tax return If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Hr block tax return   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Hr block tax return Ministers' and military housing allowance. Hr block tax return   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Hr block tax return Hardest Hit Fund and Emergency Homeowners' Loan Programs. Hr block tax return   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Hr block tax return You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Hr block tax return You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Hr block tax return If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). Hr block tax return However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Hr block tax return Mortgage assistance payments under section 235 of the National Housing Act. Hr block tax return   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Hr block tax return You cannot deduct the interest that is paid for you. Hr block tax return No other effect on taxes. Hr block tax return   Do not include these mortgage assistance payments in your income. Hr block tax return Also, do not use these payments to reduce other deductions, such as real estate taxes. Hr block tax return Divorced or separated individuals. Hr block tax return   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Hr block tax return See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Hr block tax return Redeemable ground rents. Hr block tax return   In some states (such as Maryland), you can buy your home subject to a ground rent. Hr block tax return A ground rent is an obligation you assume to pay a fixed amount per year on the property. Hr block tax return Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Hr block tax return   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Hr block tax return   A ground rent is a redeemable ground rent if all of the following are true. Hr block tax return Your lease, including renewal periods, is for more than 15 years. Hr block tax return You can freely assign the lease. Hr block tax return You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specific amount. Hr block tax return The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Hr block tax return   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Hr block tax return Nonredeemable ground rents. Hr block tax return   Payments on a nonredeemable ground rent are not mortgage interest. Hr block tax return You can deduct them as rent if they are a business expense or if they are for rental property. Hr block tax return Reverse mortgages. Hr block tax return   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Hr block tax return With a reverse mortgage, you retain title to your home. Hr block tax return Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Hr block tax return Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Hr block tax return Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Hr block tax return Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Hr block tax return Rental payments. Hr block tax return   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Hr block tax return This is true even if the settlement papers call them interest. Hr block tax return You cannot deduct these payments as home mortgage interest. Hr block tax return Mortgage proceeds invested in tax-exempt securities. Hr block tax return   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Hr block tax return “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Hr block tax return Refunds of interest. Hr block tax return   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Hr block tax return If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Hr block tax return However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Hr block tax return This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Hr block tax return If you need to include the refund in income, report it on Form 1040, line 21. Hr block tax return   If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Hr block tax return For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Hr block tax return   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Hr block tax return Cooperative apartment owner. Hr block tax return   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Hr block tax return The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Hr block tax return   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Hr block tax return Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Hr block tax return Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Hr block tax return This image is too large to be displayed in the current screen. Hr block tax return Please click the link to view the image. Hr block tax return Figure B. Hr block tax return Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Hr block tax return See Points paid by the seller , later. Hr block tax return General Rule You generally cannot deduct the full amount of points in the year paid. Hr block tax return Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Hr block tax return See Deduction Allowed Ratably , next. Hr block tax return For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Hr block tax return Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Hr block tax return You use the cash method of accounting. Hr block tax return This means you report income in the year you receive it and deduct expenses in the year you pay them. Hr block tax return Most individuals use this method. Hr block tax return Your loan is secured by a home. Hr block tax return (The home does not need to be your main home. Hr block tax return ) Your loan period is not more than 30 years. Hr block tax return If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Hr block tax return Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Hr block tax return Example. Hr block tax return You use the cash method of accounting. Hr block tax return In 2013, you took out a $100,000 loan payable over 20 years. Hr block tax return The terms of the loan are the same as for other 20-year loans offered in your area. Hr block tax return You paid $4,800 in points. Hr block tax return You made 3 monthly payments on the loan in 2013. Hr block tax return You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Hr block tax return In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Hr block tax return Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Hr block tax return (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Hr block tax return ) Your loan is secured by your main home. Hr block tax return (Your main home is the one you ordinarily live in most of the time. Hr block tax return ) Paying points is an established business practice in the area where the loan was made. Hr block tax return The points paid were not more than the points generally charged in that area. Hr block tax return You use the cash method of accounting. Hr block tax return This means you report income in the year you receive it and deduct expenses in the year you pay them. Hr block tax return Most individuals use this method. Hr block tax return The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Hr block tax return The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Hr block tax return The funds you provided are not required to have been applied to the points. Hr block tax return They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Hr block tax return You cannot have borrowed these funds from your lender or mortgage broker. Hr block tax return You use your loan to buy or build your main home. Hr block tax return The points were computed as a percentage of the principal amount of the mortgage. Hr block tax return The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Hr block tax return The points may be shown as paid from either your funds or the seller's. Hr block tax return Note. Hr block tax return If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Hr block tax return Home improvement loan. Hr block tax return   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Hr block tax return Second home. Hr block tax return You cannot fully deduct in the year paid points you pay on loans secured by your second home. Hr block tax return You can deduct these points only over the life of the loan. Hr block tax return Refinancing. Hr block tax return   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Hr block tax return This is true even if the new mortgage is secured by your main home. Hr block tax return   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , 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 tax return You can deduct the rest of the points over the life of the loan. Hr block tax return Example 1. Hr block tax return In 1998, Bill Fields got a mortgage to buy a home. Hr block tax return In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Hr block tax return The mortgage is secured by his home. Hr block tax return To get the new loan, he had to pay three points ($3,000). Hr block tax return Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Hr block tax return Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Hr block tax return The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Hr block tax return Bill's first payment on the new loan was due July 1. Hr block tax return He made six payments on the loan in 2013 and is a cash basis taxpayer. Hr block tax return Bill used the funds from the new mortgage to repay his existing mortgage. Hr block tax return Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Hr block tax return He cannot deduct all of the points in 2013. Hr block tax return He can deduct two points ($2,000) ratably over the life of the loan. Hr block tax return He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Hr block tax return The other point ($1,000) was a fee for services and is not deductible. Hr block tax return Example 2. Hr block tax return The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Hr block tax return Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Hr block tax return His deduction is $500 ($2,000 × 25%). Hr block tax return Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Hr block tax return This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Hr block tax return The total amount Bill deducts in 2013 is $550 ($500 + $50). Hr block tax return Special Situations This section describes certain special situations that may affect your deduction of points. Hr block tax return Original issue discount. Hr block tax return   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Hr block tax return This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Hr block tax return Amounts charged for services. Hr block tax return    Amounts charged by the lender for specific services connected to the loan are not interest. Hr block tax return Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Hr block tax return  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Hr block tax return Points paid by the seller. Hr block tax return   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Hr block tax return Treatment by seller. Hr block tax return   The seller cannot deduct these fees as interest. Hr block tax return But they are a selling expense that reduces the amount realized by the seller. Hr block tax return See Publication 523 for information on selling your home. Hr block tax return Treatment by buyer. Hr block tax return   The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Hr block tax return If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Hr block tax return If any of those tests are not met, the buyer deducts the points over the life of the loan. Hr block tax return   If you need information about the basis of your home, see Publication 523 or Publication 530. Hr block tax return Funds provided are less than points. Hr block tax return   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Hr block tax return In addition, you can deduct any points paid by the seller. Hr block tax return Example 1. Hr block tax return When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Hr block tax return You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Hr block tax return Of the $1,000 charged for points, you can deduct $750 in the year paid. Hr block tax return You spread the remaining $250 over the life of the mortgage. Hr block tax return Example 2. Hr block tax return The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Hr block tax return In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Hr block tax return You spread the remaining $250 over the life of the mortgage. Hr block tax return You must reduce the basis of your home by the $1,000 paid by the seller. Hr block tax return Excess points. Hr block tax return   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Hr block tax return You must spread any additional points over the life of the mortgage. Hr block tax return Mortgage ending early. Hr block tax return   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Hr block tax return However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Hr block tax return Instead, deduct the remaining balance over the term of the new loan. Hr block tax return   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Hr block tax return Example. Hr block tax return Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Hr block tax return He deducts $200 points per year. Hr block tax return Through 2012, Dan has deducted $2,200 of the points. Hr block tax return Dan prepaid his mortgage in full in 2013. Hr block tax return He can deduct the remaining $800 of points in 2013. Hr block tax return Limits on deduction. Hr block tax return   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Hr block tax return See the Table 1 Instructions for line 10. Hr block tax return Form 1098. Hr block tax return    The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Hr block tax return See Form 1098, Mortgage Interest Statement , later. Hr block tax return Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Hr block tax return The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Hr block tax return Qualified mortgage insurance. Hr block tax return   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Hr block tax return   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Hr block tax return If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Hr block tax return The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. Hr block tax return These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Hr block tax return Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Hr block tax return Special rules for prepaid mortgage insurance. Hr block tax return   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Hr block tax return You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Hr block tax return No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Hr block tax return This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Hr block tax return Example. Hr block tax return Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Hr block tax return Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Hr block tax return Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Hr block tax return Ryan's adjusted gross income (AGI) for 2012 is $76,000. Hr block tax return Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Hr block tax return For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Hr block tax return In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Hr block tax return Limit on deduction. Hr block tax return   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Hr block tax return See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Hr block tax return If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Hr block tax return Form 1098. Hr block tax return   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. Hr block tax return See Form 1098, Mortgage Interest Statement, next. Hr block tax return Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Hr block tax return You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. Hr block tax return A governmental unit is a person for purposes of furnishing the statement. Hr block tax return The statement for each year should be sent to you by January 31 of the following year. Hr block tax return A copy of this form will also be sent to the IRS. Hr block tax return The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Hr block tax return However, it should not show any interest that was paid for you by a government agency. Hr block tax return As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Hr block tax return However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Hr block tax return See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Hr block tax return Prepaid interest on Form 1098. Hr block tax return   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Hr block tax return However, you cannot deduct the prepaid amount for January 2014 in 2013. Hr block tax return (See Prepaid interest , earlier. Hr block tax return ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Hr block tax return You will include the interest for January 2014 with other interest you pay for 2014. Hr block tax return Refunded interest. Hr block tax return   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Hr block tax return See Refunds of interest , earlier. Hr block tax return Mortgage insurance premiums. Hr block tax return   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Hr block tax return See Mortgage Insurance Premiums , earlier. Hr block tax return How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Hr block tax return If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Hr block tax return Attach a statement explaining the difference and print “See attached” next to line 10. Hr block tax return Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Hr block tax return If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Hr block tax return The seller must give you this number and you must give the seller your TIN. Hr block tax return A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Hr block tax return Failure to meet any of these requirements may result in a $50 penalty for each failure. Hr block tax return The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Hr block tax return If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Hr block tax return Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Hr block tax return More than one borrower. Hr block tax return   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Hr block tax return Show how much of the interest each of you paid, and give the name and address of the person who received the form. Hr block tax return Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Hr block tax return Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Hr block tax return   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Hr block tax return Let each of the other borrowers know what his or her share is. Hr block tax return Mortgage proceeds used for business or investment. Hr block tax return   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. Hr block tax return It shows where to deduct the part of your excess interest that is for those activities. Hr block tax return The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. Hr block tax return Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Hr block tax return This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Hr block tax return Cooperative housing corporation. Hr block tax return   This is a corporation that meets all of the following conditions. Hr block tax return Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. Hr block tax return Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Hr block tax return For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Hr block tax return At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. Hr block tax return At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. Hr block tax return Stock used to secure debt. Hr block tax return   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). Hr block tax return However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. Hr block tax return See chapter 4 of Publication 535 for details on these rules. Hr block tax return Figuring deductible home mortgage interest. Hr block tax return   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. Hr block tax return The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. Hr block tax return   Figure your share of this interest by multiplying the total by the following fraction. Hr block tax return      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Hr block tax return   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. Hr block tax return The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Hr block tax return (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Hr block tax return ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. Hr block tax return Form 1098. Hr block tax return    The cooperative should give you a Form 1098 showing your share of the interest. Hr block tax return Use the rules in this publication to determine your deductible mortgage interest. Hr block tax return Part II. Hr block tax return Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Hr block tax return These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . Hr block tax return Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. Hr block tax return This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. Hr block tax return Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Hr block tax return Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). Hr block tax return It also must be secured by that home. Hr block tax return If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Hr block tax return The additional debt may qualify as home equity debt (discussed later). Hr block tax return Home acquisition debt limit. Hr block tax return   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Hr block tax return This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Hr block tax return Debt over this limit may qualify as home equity debt (also discussed later). Hr block tax return Refinanced home acquisition debt. Hr block tax return   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Hr block tax return However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Hr block tax return Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). Hr block tax return Mortgage that qualifies later. Hr block tax return   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Hr block tax return For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. Hr block tax return However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Hr block tax return Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Hr block tax return However, if the property later becomes a qualified home, the debt may qualify after that time. Hr block tax return Mortgage treated as used to buy, build, or improve home. Hr block tax return   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. Hr block tax return This applies in the following situations. Hr block tax return You buy your home within 90 days before or after the date you take out the mortgage. Hr block tax return The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). Hr block tax return (See Example 1 later. Hr block tax return ) You build or improve your home and take out the mortgage before the work is completed. Hr block tax return The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Hr block tax return You build or improve your home and take out the mortgage within 90 days after the work is completed. Hr block tax return The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. Hr block tax return (See Example 2 later. Hr block tax return ) Example 1. Hr block tax return You bought your main home on June 3 for $175,000. Hr block tax return You paid for the home with cash you got from the sale of your old home. Hr block tax return On July 15, you took out a mortgage of $150,000 secured by your main home. Hr block tax return You used the $150,000 to invest in stocks. Hr block tax return You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. Hr block tax return The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Hr block tax return Example 2. Hr block tax return On January 31, John began building a home on the lot that he owned. Hr block tax return He used $45,000 of his personal funds to build the home. Hr block tax return The home was completed on October 31. Hr block tax return On November 21, John took out a $36,000 mortgage that was secured by the home. Hr block tax return The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Hr block tax return The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. Hr block tax return This is illustrated by Figure C. Hr block tax return   Please click here for the text description of the image. Hr block tax return Figure C. Hr block tax return John's example Date of the mortgage. Hr block tax return   The date you take out your mortgage is the day the loan proceeds are disbursed. Hr block tax return This is generally the closing date. Hr block tax return You can treat the day you apply in writing for your mortgage as the date you take it out. Hr block tax return However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Hr block tax return If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Hr block tax return Cost of home or improvements. Hr block tax return   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Hr block tax return   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. Hr block tax return Substantial improvement. Hr block tax return   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. Hr block tax return    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Hr block tax return However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. Hr block tax return Acquiring an interest in a home because of a divorce. Hr block tax return   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. Hr block tax return Part of home not a qualified home. Hr block tax return    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. Hr block tax return See Divided use of your home under Qualified Home in Part I. Hr block tax return Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Hr block tax return In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Hr block tax return Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. Hr block tax return Example. Hr block tax return You bought your home for cash 10 years ago. Hr block tax return You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. Hr block tax return This loan is home equity debt. Hr block tax return Home equity debt limit. Hr block tax return   There is a limit on the amount of debt that can be treated as home equity debt. Hr block tax return The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Hr block tax return Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Hr block tax return Example. Hr block tax return You own one home that you bought in 2000. Hr block tax return Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Hr block tax return Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Hr block tax return To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Hr block tax return Your home equity debt is limited to $15,000. Hr block tax return This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. Hr block tax return Debt higher than limit. Hr block tax return   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. Hr block tax return But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Hr block tax return If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Hr block tax return Part of home not a qualified home. Hr block tax return   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. Hr block tax return See Divided use of your home under Qualified Home in Part I. Hr block tax return Fair market value (FMV). Hr block tax return    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Hr block tax return Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. Hr block tax return Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. Hr block tax return To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Hr block tax return How you used the proceeds does not matter. Hr block tax return Grandfathered debt is not limited. Hr block tax return All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Hr block tax return However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. Hr block tax return Refinanced grandfathered debt. Hr block tax return   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. Hr block tax return To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). Hr block tax return The debt must be secured by the qualified home. Hr block tax return   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. Hr block tax return After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Hr block tax return Exception. Hr block tax return   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. Hr block tax return This term cannot be more than 30 years. Hr block tax return Example. Hr block tax return Chester took out a $200,000 first mortgage on his home in 1986. Hr block tax return The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Hr block tax return Chester refinanced the debt in 1991 with a new 20-year mortgage. Hr block tax return The refinanced debt is treated as grandfathered debt for its entire term (20 years). Hr block tax return Line-of-credit mortgage. Hr block tax return    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. Hr block tax return The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Hr block tax return The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Hr block tax return See Average Mortgage Balance in the Table 1 Instructions that follow. Hr block tax return Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. Hr block tax return All the mortgages are grandfathered debt. Hr block tax return The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Hr block tax return In either of those cases, you do not need Table 1. Hr block tax return Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Hr block tax return Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Hr block tax return Table 1. Hr block tax return Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Hr block tax return Part I Qualified Loan Limit 1. Hr block tax return Enter the average balance of all your grandfathered debt. Hr block tax return See line 1 instructions 1. Hr block tax return   2. Hr block tax return Enter the average balance of all your home acquisition debt. Hr block tax return See line 2 instructions 2. Hr block tax return   3. Hr block tax return Enter $1,000,000 ($500,000 if married filing separately) 3. Hr block tax return   4. Hr block tax return Enter the larger of the amount on line 1 or the amount on line 3 4. Hr block tax return   5. Hr block tax return Add the amounts on lines 1 and 2. Hr block tax return Enter the total here 5. Hr block tax return   6. Hr block tax return Enter the smaller of the amount on line 4 or the amount on line 5 6. Hr block tax return   7. Hr block tax return If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Hr block tax return See the line 7 instructions for the limit which may apply to you. Hr block tax return 7. Hr block tax return   8. Hr block tax return Add the amounts on lines 6 and 7. Hr block tax return Enter the total. Hr block tax return This is your qualified loan limit. Hr block tax return 8. Hr block tax return   Part II Deductible Home Mortgage Interest 9. Hr block tax return Enter the total of the average balances of all mortgages on all qualified homes. Hr block tax return  See line 9 instructions 9. Hr block tax return     If line 8 is less than line 9, go on to line 10. Hr block tax return If line 8 is equal to or more than line 9, stop here. Hr block tax return All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Hr block tax return     10. Hr block tax return Enter the total amount of interest that you paid. Hr block tax return See line 10 instructions 10. Hr block tax return   11. Hr block tax return Divide the amount on line 8 by the amount on line 9. Hr block tax return Enter the result as a decimal amount (rounded to three places) 11. Hr block tax return × . Hr block tax return 12. Hr block tax return Multiply the amount on line 10 by the decimal amount on line 11. Hr block tax return Enter the result. Hr block tax return This is your deductible home mortgage interest. Hr block tax return Enter this amount on Schedule A (Form 1040) 12. Hr block tax return   13. Hr block tax return Subtract the amount on line 12 from the amount on line 10. Hr block tax return Enter the result. Hr block tax return This is not home mortgage interest. Hr block tax return See line 13 instructions 13. Hr block tax return   Home equity debt only. Hr block tax return   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Hr block tax return Enter zero on line 6 and complete the rest of Table 1. Hr block tax return Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Hr block tax return You need these amounts to complete lines 1, 2, and 9 of Table 1. Hr block tax return You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Hr block tax return The following are methods you can use to figure your average mortgage balances. Hr block tax return However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Hr block tax return Average of first and last balance method. Hr block tax return   You can use this method if all the following apply. Hr block tax return You did not borrow any new amounts on the mortgage during the year. Hr block tax return (This does not include borrowing the original mortgage amount. Hr block tax return ) You did not prepay more than one month's principal during the year. Hr block tax return (This includes prepayment by refinancing your home or by applying proceeds from its sale. Hr block tax return ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Hr block tax return You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Hr block tax return    To figure your average balance, complete the following worksheet. Hr block tax return    1. Hr block tax return Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. Hr block tax return Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. Hr block tax return Add amounts on lines 1 and 2   4. Hr block tax return Divide the amount on line 3 by 2. Hr block tax return Enter the result   Interest paid divided by interest rate method. Hr block tax return   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. Hr block tax return    Complete the following worksheet to figure your average balance. Hr block tax return    1. Hr block tax return Enter the interest paid in 2013. Hr block tax return Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Hr block tax return However, do include interest that is for 2013 but was paid in an earlier year   2. Hr block tax return Enter the annual interest rate on the mortgage. Hr block tax return If the interest rate varied in 2013, use the lowest rate for the year   3. Hr block tax return Divide the amount on line 1 by the amount on line 2. Hr block tax return Enter the result   Example. Hr block tax return Mr. Hr block tax return Blue had a line of credit secured by his main home all year. Hr block tax return He paid interest of $2,500 on this loan. Hr block tax return The interest rate on the loan was 9% (. Hr block tax return 09) all year. Hr block tax return His average balance using this method is $27,778, figured as follows. Hr block tax return 1. Hr block tax return Enter the interest paid in 2013. Hr block tax return Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Hr block tax return However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Hr block tax return Enter the annual interest rate on the mortgage. Hr block tax return If the interest rate varied in 2013, use the lowest rate for the year . Hr block tax return 09 3. Hr block tax return Divide the amount on line 1 by the amount on line 2. Hr block tax return Enter the result $27,778 Statements provided by your lender. Hr block tax return   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. Hr block tax return You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Hr block tax return   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. Hr block tax return   If your lender can give you your average balance for the year, you can use that amount. Hr block tax return Example. Hr block tax return Ms. Hr block tax return Brown had a home equity loan secured by her main home all year. Hr block tax return She received monthly statements showing her average balance for each month. Hr block tax return She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Hr block tax return Mixed-use mortgages. Hr block tax return   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). Hr block tax return For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). Hr block tax return   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. Hr block tax return Do not use the methods described earlier in this section to figure the average balance of either category. Hr block tax return Instead, for each category, use the following method. Hr block tax return Figure the balance of that category of debt for each month. Hr block tax return This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Hr block tax return Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. Hr block tax return Add together the monthly balances figured in (1). Hr block tax return Divide the result in (2) by 12. Hr block tax return   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. Hr block tax return Example 1. Hr block tax return In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Hr block tax return On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. Hr block tax return She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Hr block tax return Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Hr block tax return During 2013, her principal payments on the second mortgage totaled $10,000. Hr block tax return To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. Hr block tax return The January and February balances were zero. Hr block tax return The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Hr block tax return (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Hr block tax return ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Hr block tax return Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Hr block tax return Example 2. Hr block tax return The facts are the same as in Example 1. Hr block tax return In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Hr block tax return The balance of the home acquisition debt remains $180,000 for each of those months. Hr block tax return Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). Hr block tax return The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Hr block tax return Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Hr block tax return L
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The Hr Block Tax Return

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