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This section describes certain items that can be included as home mortgage interest and others that cannot. It also describes certain special situations that may affect your deduction.Late payment charge on mortgage payment:
You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.Mortgage prepayment penalty:
If you pay off your home mortgage early, you may have to pay a penalty. 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.Sale of home:
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.Example:
John and Peggy Harris sold their home on May 7. Through April 30, they made home mortgage interest payments of $1,220. 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. Their mortgage interest deduction is $1,270 ($1,220 + $50).Prepaid interest:
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. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, discussed later.Mortgage interest credit:
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. Figure the credit on Form 8396, Mortgage Interest Credit. If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. See Form 8396 and IRS Publication 530 for more information on the mortgage interest credit.Ministers' and military housing allowance:
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.Mortgage assistance payments:
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. You cannot deduct the interest that is paid for you. No other effect on taxes - Do not include these mortgage assistance payments in your income. Also, do not use these payments to reduce other deductions, such as real estate taxes.Divorced or separated individuals:
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. See the discussion of Payments for jointly-owned home under Alimony in IRS Publication 504, Divorced or Separated Individuals.Redeemable ground rents:
In some states (such as Maryland), you can buy your home subject to a ground rent. A ground rent is an obligation you assume to pay a fixed amount per year on the property. Under this arrangement, you are leasing (rather than buying) the land on which your home is located.If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest.
A ground rent is a redeemable ground rent if all of the following are true:
- Your lease, including renewal periods, is for more than 15 years.
- You can freely assign the lease.
- 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.
- The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled.
Payments made to end the lease and to buy the lessor's entire interest in the land are not ground rents. You cannot deduct them.
Nonredeemable ground rents:
Payments on a nonredeemable ground rent are not mortgage interest. You can deduct them as rent if they are a business expense or if they are for rental property.Rental payments:
If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. This is true even if the settlement papers call them interest. You cannot deduct these payments as home mortgage interest.Mortgage proceeds invested in tax-exempt securities:
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. “Grandfathered debt” and “home equity debt” are defined in Part II of this publication.Refunds of interest:
If you receive a refund of interest in the same year you paid it, you must reduce your interest expense by the amount refunded to you. 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. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. If you need to include the refund in income, report it on Form 1040, line 21.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. For information about Form 1098, see Form 1098, Mortgage Interest Statement, later.
For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in IRS Publication 525, Taxable and Nontaxable Income.
Cooperative apartment owner:
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. The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct.
From IRS Publication 936
All Chapters concerning this topic: home mortgage interest; secured debt; qualified home; Special Situations; Points; Mortgage Insurance Premiums; Form 1098, Mortgage Interest Statement; How To Report; Special Rule for Tenant-Stockholders; Home Acquisition Debt; Home Equity Debt; Grandfathered Debt
