Publication 936 - Home Mortgage Interest Deduction

ing, such as a home office, you must allocate the

requirement, count your days of use and rental

on your mortgage may be paid for you. You

use of your home. You must then divide both the

of the home only during the time you have a right

cannot deduct the interest that is paid for you.

cost and fair market value of your home between

to use it or to receive any benefits from the rental

No other effect on taxes. Do not include

the part that is a qualified home and the part that

of it.

these mortgage assistance payments in your

is not. Dividing the cost may affect the amount of

income. Also, do not use these payments to

Married taxpayers. If you are married and file

your home acquisition debt, which is limited to

reduce other deductions, such as real estate

a joint return, your qualified home(s) can be

the cost of your home plus the cost of any

taxes.

owned either jointly or by only one spouse.

improvements. (See Home Acquisition Debt in

Divorced or separated individuals. If a di-

Part II.) Dividing the fair market value may affect

Separate returns. If you are married filing

vorce or separation agreement requires you or

your home equity debt limit, also explained in

separately and you and your spouse own more

your spouse or former spouse to pay home

Part II.

than one home, you can each take into account

mortgage interest on a home owned by both of

only one home as a qualified home. However, if

Renting out part of home. If you rent out

you, the payment of interest may be alimony.

you both consent in writing, then one spouse

part of a qualified home to another person (ten-

See the discussion of Payments for

can take both the main home and a second

ant), you can treat the rented part as being used

jointly-owned home under Alimony in Publica-

home into account.

by you for residential living only if all three of the

tion 504, Divorced or Separated Individuals.

following conditions apply.

Special Situations

Redeemable ground rents. In some states

1) The rented part of your home is used by

(such as Maryland), you may buy your home

This section describes certain items that can be

the tenant primarily for residential living.

subject to a ground rent. A ground rent is an

included as home mortgage interest and others

obligation you assume to pay a fixed amount per

2) The rented part of your home is not a

that cannot. It also describes certain special

year on the property. Under this arrangement,

self-contained residential unit having sepa-

situations that may affect your deduction.

you are leasing (rather than buying) the land on

rate sleeping, cooking, and toilet facilities.

which your home is located.

Late payment charge on mortgage payment.

3) You do not rent (directly or by sublease)

If you make annual or periodic rental pay-

You can deduct as home mortgage interest a

the same or different parts of your home to

ments on a redeemable ground rent, you can

late payment charge if it was not for a specific

more than two tenants at any time during

deduct them as mortgage interest.

service in connection with your mortgage loan.

the tax year. If two persons (and depen-

A ground rent is a redeemable ground rent if

dents of either) share the same sleeping

Mortgage prepayment penalty. If you pay off

all of the following are true.

quarters, they are treated as one tenant.

your home mortgage early, you may have to pay

1) Your lease, including renewal periods, is

a penalty. You can deduct that penalty as home

for more than 15 years.

Office in home. If you have an office in your

mortgage interest provided the penalty is not for

home that you use in your business, see Publi-

a specific service performed or cost incurred in

2) You can freely assign the lease.

cation 587, Business Use of Your Home. It ex-

connection with your mortgage loan.

3) You have a present or future right (under

plains how to figure your deduction for the

Sale of home. If you sell your home, you can

state or local law) to end the lease and buy

business use of your home, which includes the

deduct your home mortgage interest (subject to

the lessor’s entire interest in the land by

business part of your home mortgage interest.

any limits that apply) paid up to, but not includ-

paying a specific amount.

Home under construction. You can treat a

ing, the date of the sale.

4) The lessor’s interest in the land is primarily

home under construction as a qualified home for

a security interest to protect the rental pay-

a period of up to 24 months, but only if it be-

Example. John and Peggy Harris sold their

ments to which he or she is entitled.

comes your qualified home at the time it is ready

home on May 7. Through April 30, they made

for occupancy.

home mortgage interest payments of $1,220.

Payments made to end the lease and to buy

The 24-month period can start any time on or

The settlement sheet for the sale of the home

the lessor’s entire interest in the land are not

after the day construction begins.

showed $50 interest for the 6-day period in May

ground rents. You cannot deduct them.

up to, but not including, the date of sale. Their

Home destroyed. You may be able to con-

Nonredeemable ground rent. Payments

mortgage interest deduction is $1,270 ($1,220 +

tinue treating your home as a qualified home

on a nonredeemable ground rent are not mort-

$50).

even after it is destroyed in a fire, storm, tor-

gage interest. You can deduct them as rent if

nado, earthquake, or other casualty. This means

Prepaid interest. If you pay interest in ad-

they are a business expense or if they are for

you can continue to deduct the interest you pay

vance for a period that goes beyond the end of

rental property.

on your home mortgage, subject to the limits

the tax year, you must spread this interest over

Rental payments. If you live in a house before

described in this publication.

the tax years to which it applies. You can deduct

final settlement on the purchase, any payments

You can continue treating a destroyed home

in each year only the interest that qualifies as

you make for that period are rent and not inter-

as a qualified home if, within a reasonable pe-

home mortgage interest for that year. However,

est. This is true even if the settlement papers call

riod of time after the home is destroyed, you:

there is an exception that applies to points, dis-

them interest. You cannot deduct these pay-

cussed later.

1) Rebuild the destroyed home and move

ments as home mortgage interest.

Mortgage interest credit. You may be able to

into it, or

Mortgage proceeds invested in tax-exempt

claim a mortgage interest credit if you were

2) Sell the land on which the home was lo-

securities. You cannot deduct the home mort-

issued a mortgage credit certificate (MCC) by a

cated.

gage interest on grandfathered debt or home

state or local government. Figure the credit on

equity debt if you used the proceeds of the

Form 8396, Mortgage Interest Credit. If you take

This rule applies to your main home and to a

mortgage to buy securities or certificates that

this credit, you must reduce your mortgage inter-

second home that you treat as a qualified home.

produce tax-free income. Grandfathered debt

est deduction by the amount of the credit.

Time-sharing arrangements. You can treat a

and home equity debt are defined in Part II of

See Form 8396 and Publication 530 for more

home you own under a time-sharing plan as a

this publication.

information on the mortgage interest credit.

qualified home if it meets all the requirements. A

Refunds of interest. If you receive a refund of

Ministers’ and military housing allowance.

time-sharing plan is an arrangement between

interest in the same year you paid it, you must

If you are a minister or a member of the uni-

two or more people that limits each person’s

reduce your interest expense by the amount

formed services and receive a housing allow-

interest in the home or right to use it to a certain

refunded to you. If you receive a refund of inter-

ance that is not taxable, you can still deduct your

part of the year.

est you deducted in an earlier year, you gener-

home mortgage interest.

Rental of time-share. If you rent out your

ally must include the refund in income in the year

time-share, it qualifies as a second home only if

Mortgage assistance payments. If you qual-

you receive it. However, you need to include it

you also use it as a home during the year. See

ify for mortgage assistance payments for

only up to the amount of the deduction that

Second home rented out, earlier, for the use

lower-income families under section 235 of the

reduced your tax in the earlier year. This is true

requirement. To know whether you meet that

National Housing Act, part or all of the interest

whether the interest overcharge was refunded to

Page 4

Publication 936 - Home Mortgage Interest Deduction - 2003 Page 4

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