Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. See Table 1 for a summary of where to deduct home mortgage interest and real estate taxes.
If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. The seller must give you this number and you must give the seller your SSN. Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Failure to meet either of these requirements may result in a $50 penalty for each failure.
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 to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. The statement will show the total interest paid on your mortgage during the year. If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. See Points, earlier.
The interest you paid at settlement should be included on the statement. If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Write â€œSee attachedâ€ to the right of line 10.
A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. If a statement comes from a cooperative housing corporation, it generally will show your share of interest.
Your mortgage interest statement for 2008 should be provided or sent to you by January 31, 2009. If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. A copy of this form will be sent to the IRS also.
You bought a new home on May 3. You paid no points on the purchase. During the year, you made mortgage payments which included $4,480 deductible interest on your new home. The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). You can deduct the $5,100 if you itemize your deductions.
Refund of overpaid interest. Â Â If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Generally, you must include the refund in income in the year you receive it. See Refund of home mortgage interest, earlier, under Home Mortgage Interest.
More than one borrower. Â Â 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. Show how much of the interest each of you paid, and give the name and address of the person who received the form. Deduct your share of the interest on Schedule A (Form 1040), line 11, and write â€œSee attachedâ€ to the right of that line.
Mortgage Insurance Premiums
You can take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2008 for qualified mortgage insurance in connection with home acquisition debt on your qualified home.
Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction.
Qualified Mortgage Insurance
Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).
Special rules for prepaid mortgage insurance. Â Â If you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year, such premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. The two preceding sentences do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.
Â Â At the time this publication went to print, regulations were being considered that would allow you to allocate qualified mortgage insurance premiums paid in connection with a mortgage obtained after 2006 over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained.
Â Â More information can be found in Publication 553, Highlights of the 2008 Tax Changes which is available at www.irs.gov/formspubs. Information on this and other changes affecting individual taxpayers can also be found at www.irs.gov/formspubs. Click on Highlights of Recent Tax Changes and then on Individuals.
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. It also must be secured by that home.
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.
Home acquisition debt limit. Â Â The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately).
Discharges of qualified principal residence indebtedness. Â Â You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2012. You must reduce the basis of your principal residence (but not below zero) by the amount you exclude.
Principal residence. Â Â Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.
Qualified principal residence indebtedness. Â Â This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements.
Â Â Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness.
Amount you can exclude. Â Â You can only exclude debt discharged after 2006 and before 2012. The most you can exclude is $2 million ($1 million if married filing separately). You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition.
Ordering rule. Â Â If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness.
This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.
Main home. Â Â You can have only one main home at any one time. This is the home where you ordinarily live most of the time.
Second home and other special situations. Â Â If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936.
Limit on Deduction
If your adjusted gross income (AGI) 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 deductible is reduced and may be eliminated. See Line 13 in the instructions for Schedule A&B (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums.
Form 1098. Â Â The amount of mortgage insurance premiums you paid during 2008, should be reported in box 4; see Form 1098, Mortgage Interest Statement in Publication 936.
Mortgage Interest Credit
The mortgage interest credit is intended to help lower-income individuals afford home ownership. If you qualify, you can claim the credit each year for part of the home mortgage interest you pay.
Who qualifies. Â Â You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.
The MCC will show the certificate credit rate you will use to figure your credit. It also will show the certified indebtedness amount. Only the interest on that amount qualifies for the credit. See Figuring the Credit, later.
Table 1. Where To Deduct Interest and Taxes Paid on Your Home
See the text for information on what expenses are eligible.
IF you are eligible to deduct . . .
THEN report the amount on Schedule A (Form 1040) . . .
real estate taxes
home mortgage interest and points reported on Form 1098
home mortgage interest not reported on Form 1098
points not reported on Form 1098
qualified mortgage insurance premiums
You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Contact your state or local housing finance agency for information about the availability of MCCs in your area.
How to claim the credit. Â Â To claim the credit, complete Form 8396 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 53; be sure to check box a on that line.
Reducing your home mortgage interest deduction. Â Â If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2009.
Selling your home. Â Â If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523.
Figuring the Credit
Figure your credit on Form 8396.
Mortgage not more than certified indebtedness. Â Â If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.
Mortgage more than certified indebtedness. Â Â If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.
Certified indebtedness amount on your MCC
Original amount of your mortgage
Â Â The fraction will not change as long as you are entitled to take the mortgage interest credit.
Emily bought a home this year. Her mortgage loan is $125,000. The certified indebtedness amount on her MCC is $100,000. She paid $7,500 interest this year. Emily figures the interest to enter on Form 8396, line 1, as follows:
Emily enters $6,000 on Form 8396, line 1. In each later year, she will figure her credit using only 80% of the interest she pays for that year.