Instructions For Form 1098 - 2006 (Page 5 of 27) in pdf

origination fee” (including amounts for VA and FHA loans),

Example. Interest received on December 20, 2006, that

“loan discount,” “discount points,” or “points.”

accrues by December 31 but is not due until January 31, 2007,

2. They are computed as a percentage of the stated

is reportable on the 2006 Form 1098.

principal loan amount.

Exception. Interest received during the current year that will

3. They are charged under an established business practice

properly accrue in full by January 15 of the following year may

of charging points in the area where the loan was issued and do

be considered received in the current year, at your option, and

not exceed the amount generally charged in that area.

is reportable on Form 1098 for the current year. However, if any

4. They are paid for the acquisition of the payer of record’s

part of an interest payment accrues after January 15, then only

principal residence, and the loan is secured by that residence.

the amount that properly accrues by December 31 of the

You may rely on a signed written statement from the payer of

current year is reportable on Form 1098 for the current year.

record that states that the proceeds of the loan are for the

For example, if you receive a payment of interest that accrues

purchase of the payer of record’s principal residence.

for the period December 20 through January 20, you cannot

5. They are paid directly by the payer of record. Points are

report any of the interest that accrues after December 31 for the

paid directly if either a or b below apply:

current year. You must report the interest that accrues after

a. The payer of record provides funds that were not

December 31 on Form 1098 for the following year.

borrowed from the lender of record for this purpose as part of

the overall transaction. The funds may include down payments,

Reimbursement of Overpaid Interest

escrow deposits, earnest money applied at closing, and other

You are required to report reimbursements of overpaid interest

funds actually paid over by the payer of record at or before

aggregating $600 or more to a payer of record on Form 1098.

closing.

You are not required to report reimbursements of overpaid

b. The seller pays points on behalf of the payer of record.

interest aggregating less than $600 unless you are otherwise

Points paid by the seller to the interest recipient on behalf of the

required to file Form 1098. That is, if you did not receive at least

payer of record are treated as paid to the payer of record and

$600 of mortgage interest during the year of reimbursement

then paid directly by the payer of record to the interest recipient.

from the person to whom you made the reimbursement, you are

not required to file Form 1098 merely to report a reimbursement

Report points paid under 5a and 5b on the payer of record’s

of less than $600. However, you may report any reimbursement

Form 1098 in box 2.

of overpaid interest that you are not otherwise required to

report, but you are subject to the rules in these instructions.

Exceptions. Do not report as points on Form 1098 amounts

paid:

•

The reimbursement must be reported on Form 1098 for the

For loans to improve a principal residence;

•

year in which the reimbursement is made. No change should be

For loans to purchase or improve a residence that is not the

made to the prior year Form 1098 because of this

payer of record’s principal residence, such as a second home,

reimbursement. Report the total reimbursement even if it is for

vacation, investment, or trade or business property even though

overpayments made in more than 1 year.

the borrower may be entitled to amortize points paid for the

purchase of a second home, vacation home, etc. and deduct

To be reportable, the reimbursement must be a refund or

them over the life of the loan;

credit of mortgage interest received in a prior year that was

•

For a home equity or line of credit loan, even if secured by

required to be reported for that prior year by any interest

the principal residence;

recipient on Form 1098. Only the person who makes the

•

For a refinancing (but see Construction loans below),

reimbursement is required to report it on Form 1098. For

including a loan to refinance a debt owed by the borrower under

example, if you bought a mortgage on which interest was

a land contract, a contract for deed, or similar forms of seller

overpaid in a prior year, you made a reimbursement of the

financing;

overpaid interest, and the previous mortgage holder was

•

In lieu of items ordinarily stated separately on the Form

required to report mortgage interest on Form 1098 in the prior

HUD-1, such as appraisal fees, inspection fees, title fees,

year, you must file Form 1098 to report the reimbursement

attorney fees, and property taxes; and

because you are the one making the reimbursement.

•

To acquire a principal residence to the extent the points are

Example. In 2004, you received $5,000 of mortgage interest

allocable to an amount of principal in excess of $1 million.

from the payer/borrower and reported that amount on Form

Construction loans. Amounts paid on a loan to construct a

1098 for 2004. In 2006, you determined that interest due on the

residence (construction loan) or to refinance a loan incurred to

mortgage for 2004 was $4,500, and the payer/borrower had

construct a residence are reportable on Form 1098 as points if

overpaid $500. You refunded the $500 overpayment to the

they:

payer/borrower in 2006. If you received $600 or more of interest

•

Are clearly designated on the loan documents as points

on the mortgage from the payer/borrower in 2006, you must

incurred in connection with the loan, such as loan origination

report the $500 refund in box 3 of the 2006 Form 1098. No

fees, loan discount, discount points, or points;

change to the 2004 Form 1098 is required. If, instead of

•

Are computed as a percentage of the stated principal loan

refunding the $500 overpayment, you credited the payer/

amount;

borrower’s 2006 mortgage interest payments due, $500 is still

•

Conform to an established business practice of charging

shown in box 3, and the interest received from the payer/

points in the area where the loan is issued and do not exceed

borrower in 2006 shown in box 1 must include the $500 credit.

the amount generally charged in the area;

•

Overpayment and reimbursement in same year. If you

Are paid in connection with a loan incurred by the payer of

reimburse interest in the same year it is overpaid, do not report

record to construct (or refinance construction of) a residence

the overpayment on Form 1098 as interest received during the

that is to be used, when completed, as the principal residence

year or as a reimbursement of overpaid interest. For example, if

of the payer of record;

•

the borrower paid $5,000 and you reimbursed $500 of that

Are paid directly by the payer of record; and

•

amount in 2006, enter $4,500 in box 1 as interest paid by the

Are not allocable to an amount of principal in excess of $1

borrower. Do not enter the $500 reimbursement in box 3.

million.

Amounts paid to refinance a loan to construct a residence

Interest on reimbursement. A financial institution (or its

are not points to the extent they are allocable to debt that

middleman) that pays interest of $10 or more on the

exceeds the debt incurred to construct the residence.

reimbursement must report that interest (under section 6049)

on Form 1099-INT, Interest Income. Others that pay interest of

Prepaid Interest

$600 or more on the reimbursement must report that interest

(under section 6041) on Form 1099-INT. Do not include such

Report prepaid interest (other than points) only in the year in

interest on Form 1098.

which it properly accrues.

1098-3

Instructions For Form 1098 - 2006 Page 5

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