Update on Home Mortgage Interest Deductions
If you own a home with a mortgage, you should have received an IRS form from your lender each year with information that is used to claim an itemized deduction for qualified residence interest. For 2016, that form included additional information that could trigger unwanted attention from the IRS. Here’s what you should know about the IRS rules that apply to home mortgage interest deductions and the changes in the IRS mortgage interest reporting form.
IRS Rules for Deducting Home Mortgage Interest
Unlike most other types of personal interest, home mortgage interest that meets the definition of “qualified residence interest” can be claimed as an itemized deduction on your federal income tax return. In this article we take a closer look at the terminology underlying this deduction.
A qualified residence includes your principal residence and up to one additional personal residence. If you own two or more additional residences, you can specify which one is treated as the second residence for each tax year for the purpose of applying the qualified residence interest rules.
Qualified residence interest is defined as interest on up to $1 million of “acquisition debt” plus interest on up to $100,000 of “home equity debt.”
Acquisition debt is debt that is:
- Incurred to acquire, construct, or substantially improve a qualified residence, and
- Secured by a qualified residence.
Home equity debt is debt (other than acquisition debt) that is secured by a qualified residence. Unlike acquisition debt, the proceeds from home equity debt can be used for any purpose without affecting the deductibility of the interest under the regular tax rules. However, interest on home equity debt is deductible under the alternative minimum tax (AMT) rules only to the extent the debt proceeds are used to acquire, construct or substantially improve a qualified residence.
Important note: If you’re married and file separately from your spouse, you can deduct half of the eligible mortgage interest paid on your separate returns.
Basic Reporting Requirements
By law, home mortgage lenders must provide certain information each year to borrowers on Form 1098, “Mortgage Interest Statement.” The IRS also receives a copy of this form, which includes the following information:
- The name and address of the borrower,
- The amount of interest received by the lender from the borrower during the previous calendar year, and
- The amount of mortgage points received by the lender from the borrower during the previous calendar year and whether such points were paid directly by the borrower.
The IRS also may require additional information to be reported on Form 1098. For instance, IRS regulations require Form 1098 to include the borrower’s taxpayer identification number (TIN), which is the borrower’s Social Security Number if he or she is a citizen.
Recent Legislation Adds New Requirements
For Forms 1098 issued to payers after December 31, 2016, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 added the following new information reporting requirements:
- The mortgage origination date,
- The outstanding principal balance, and
- The address of the property that secures the mortgage (or a description if the property doesn’t have an address).
Home mortgage lenders must report the amount of the outstanding mortgage principal as of the beginning of the calendar year for which the Form 1098 is provided. Knowing the outstanding mortgage principal balance allows the IRS to more easily identify taxpayers who attempt to deduct interest on loan balances above the combined $1.1 million limit for acquisition debt and home equity debt.
Knowing the address of the property securing the mortgage allows the IRS to more easily identify taxpayers who attempt to claim mortgage interest deductions for more than two residences.
Get It Right
The bottom line is that the IRS now has the information to monitor qualified residence interest deductions more closely than in previous years. So, it’s important to understand the rules and calculate your deduction carefully.
Your Hoberman & Lessor tax advisor can help you comply with the IRS rules, including amending previous returns that may have been filed with incorrect information. Although the rules on qualified residence interest may seem straightforward, there are some lesser-known nuances that could affect the amount you can write off.
Please contact us, we would be happy to assist you.