in the year they are paid, if
you are using the cash method of accounting and paying points is an
established business practice in your area.
Interest Expense
Interest is an amount you pay for the use of borrowed
money. To deduct interest you paid on a debt you must be legally liable for
the debt. There must be a true debtor-creditor relationship. Additionally,
you generally must itemize your deductions, unless the interest is on rental
or business property or on a student loan.If you prepay interest, you must
allocate the interest over the tax years to which it applies. You may deduct
in each year only the interest that applies to that year. However, an
exception applies to points paid on a principal residence.
Types of interest you can deduct as itemized
deductions on Form 1040, Schedule A include investment interest (limited to
your net investment income) and qualified residence interest. You cannot
deduct personal interest. Personal interest includes interest paid on a loan
to purchase a car for personal use. Personal interest also includes credit
card and installment interest incurred for personal expenses. Items you
cannot deduct as interest include points (if you are a seller), service
charges, credit investigation fees, and interest relating to tax-exempt
income, such as interest to purchase or carry tax-exempt securities.You can deduct student loan interest
on Form 1040 or Form 1040A.
Qualified residence interest is interest you pay on
a loan secured by your main home or a second home. Your main home is where
you live most of the time. It can be a house, cooperative apartment,
condominium, mobile home, house trailer, or houseboat that has sleeping,
cooking, and toilet facilities.A second home can include any other
residence you own and treat as a second home. You do not have to use the
home during the year. However, if you rent it to others, you must also use
it as a home during the year for more than the greater of 14 days or 10
percent of the number of days you rent it, for the interest to qualify as
qualified residence interest.
Qualified residence interest and points are
generally reported to you on Form 1098, Mortgage Interest Statement, by the
financial institution to which you made the payments.
You can deduct all of the interest on
a mortgage you took out on or before October 13, 1987
(grandfathered debt) or a
mortgage taken out after October 13, 1987, to buy, build, or improve your
home (called home acquisition debt) up to a total of $1 million for this
debt plus any grandfathered debt. The limit is $500,000 if you are married
filing separately, or for home equity debt other than home
acquisition debt taken out after October 13, 1987, up to a total of
$100,000. The limit is $50,000 if you are married filing separately. Home
equity debt other than home acquisition debt is further limited to your
home's fair market value reduced by the grandfathered debt and home
acquisition debt.You may be
able to take a credit against your federal income tax if you were issued a
mortgage credit certificate by a state or local government for low-income
housing. Use Form 8396,
Mortgage Interest Credit, to figure the amount.
You may be subject to a limit on some of your itemized
deductions including mortgage interest.
Interest is an amount you pay for the use of
borrowed money. To deduct interest you paid on a debt you must
be legally liable for the debt, you must have a true debtor-creditor
relationship with your lender. You claim interest expenses on Schedule A of
form 1040, so you must itemize your deductions to receive the benefit. If you prepay interest, you must allocate the
interest over the tax years for which the interest applies.
