Publication 936 - Home Mortgage Interest Deduction

loan. The mortgage is secured by his home. To

paid. However, certain points not included on

Part II, but all or part of the mortgage proceeds

get the new loan, he had to pay three points

Form 1098 also may be deductible, either in the

were used for business, investment, or other

($3,000). Two points ($2,000) were for prepaid

year paid or over the life of the loan. See the

deductible activities, see Table 2 near the end of

interest, and one point ($1,000) was charged for

earlier discussion of Points to determine

this publication. It shows where to deduct the

services, in place of amounts that ordinarily are

whether you can deduct points not shown on

part of your excess interest that is for those

stated separately on the settlement statement.

Form 1098.

activities. The Table 1 Instructions for line 13 in

Bill paid the points out of his private funds, rather

Part II explain how to divide the excess interest

Prepaid interest on Form 1098. If you pre-

than out of the proceeds of the new loan. The

among the activities for which the mortgage pro-

paid interest in 2003 that accrued in full by Janu-

payment of points is an established practice in

ceeds were used.

ary 15, 2004, this prepaid interest may be

the area, and the points charged are not more

included in box 1 of Form 1098. However, you

Special Rule for

than the amount generally charged there. Bill’s

cannot deduct the prepaid amount for January

first payment on the new loan was due July 1.

Tenant-Stockholders in

2004 in 2003. (See Prepaid interest, earlier.)

He made six payments on the loan in 2003 and

Cooperative Housing

You will have to figure the interest that accrued

is a cash basis taxpayer.

for 2004 and subtract it from the amount in box

Corporations

Bill used the funds from the new mortgage to

1. You will include the interest for January 2004

repay his existing mortgage. Although the new

with other interest you pay for 2004.

A qualified home includes stock in a cooperative

mortgage loan was for Bill’s continued owner-

housing corporation owned by a tenant-stock-

ship of his main home, it was not for the

Refunded interest. If you received a refund of

holder. This applies only if the tenant-stock-

purchase or improvement of that home. He can-

mortgage interest you overpaid in an earlier

holder is entitled to live in the house or

not deduct all of the points in 2003. He can

year, you generally will receive a Form 1098

apartment because of owning stock in the coop-

deduct two points ($2,000) ratably over the life of

showing the refund in box 3. See Refunds of

the loan. He deducts $67 [($2,000 ÷ 180

erative.

interest under Special Situations, earlier.

months) × 6 payments] of the points in 2003.

Cooperative housing corporation. This is a

The other point ($1,000) was a fee for services

How To Report

corporation that meets all of the following condi-

and is not deductible.

tions.

Deduct the home mortgage interest and points

Example 2. The facts are the same as in

1) The corporation has only one class of

reported to you on Form 1098 on line 10, Sched-

Example 1, except that Bill used $25,000 of the

stock outstanding.

ule A (Form 1040). If you paid more deductible

loan proceeds to improve his home and

interest to the financial institution than the

$75,000 to repay his existing mortgage. Bill de-

2) Each of the stockholders, only because of

amount shown on Form 1098, show the larger

ducts 25% ($25,000 ÷ $100,000) of the points

owning the stock, can live in a house,

deductible amount on line 10. Attach a state-

($2,000) in 2003. His deduction is $500 ($2,000

apartment, or house trailer owned or

ment explaining the difference and print “See

× 25%).

leased by the corporation.

attached” next to line 10.

Bill also deducts the ratable part of the re-

3) No stockholder can receive any distribu-

Deduct home mortgage interest that was not

maining $1,500 ($2,000 − $500) that must be

tion out of capital, except on a partial or

reported to you on Form 1098 on line 11 of

spread over the life of the loan. This is $50

complete liquidation of the corporation.

Schedule A (Form 1040). If you paid home mort-

[($1,500 ÷ 180 months) × 6 payments] in 2003.

gage interest to the person from whom you

The total amount Bill deducts in 2003 is $550

4) The tenant-stockholders must pay at least

bought your home, show that person’s name,

($500 + $50).

80% of the corporation’s gross income for

address, and social security number (SSN) or

the tax year. For this purpose, gross in-

Limits on deduction. You cannot fully deduct

employer identification number (EIN) on the

come means all income received during

points paid on a mortgage that exceeds the

dotted lines next to line 11. The seller must give

the entire tax year, including any received

limits discussed in Part II. See the Table 1 In-

you this number and you must give the seller

before the corporation changed to cooper-

structions for line 10.

your SSN. A Form W – 9, Request for Taxpayer

ative ownership.

Identification Number and Certification, can be

Form 1098. The mortgage interest statement

used for this purpose. Failure to meet any of

you receive should show not only the total inter-

Stock used to secure debt. In some cases,

these requirements may result in a $50 penalty

est paid during the year, but also your deductible

you cannot use your cooperative housing stock

for each failure.

points paid during the year. See Mortgage Inter-

to secure a debt because of either:

If you can take a deduction for points that

est Statement, next.

were not reported to you on Form 1098, deduct

1) Restrictions under local or state law, or

those points on line 12 of Schedule A (Form

Mortgage Interest Statement

1040).

2) Restrictions in the cooperative agreement

(other than restrictions in which the main

If you paid $600 or more of mortgage interest

More than one borrower. If you and at least

purpose is to permit the tenant-stockholder

(including certain points) during the year on any

one other person (other than your spouse if you

to treat unsecured debt as secured debt).

one mortgage, you generally will receive a Form

file a joint return) were liable for and paid interest

1098, Mortgage Interest Statement, or a similar

However, you can treat a debt as secured by the

on a mortgage that was for your home, and the

statement from the mortgage holder. You will

stock to the extent that the proceeds are used to

other person received a Form 1098 showing the

receive the statement if you pay interest to a

buy the stock under the allocation of interest

interest that was paid during the year, attach a

person (including a financial institution or coop-

rules. See chapter 5 of Publication 535 for de-

statement to your return explaining this. Show

erative housing corporation) in the course of that

tails on these rules.

how much of the interest each of you paid, and

person’s trade or business. A governmental unit

give the name and address of the person who

Figuring deductible home mortgage interest.

is a person for purposes of furnishing the state-

received the form. Deduct your share of the

Generally, if you are a tenant-stockholder, you

ment.

interest on line 11 of Schedule A (Form 1040),

can deduct payments you make for your share

The statement for each year should be sent

and print “See attached” next to the line.

of the interest paid or incurred by the coopera-

to you by January 31 of the following year. A

Similarly, if you are the payer of record on a

tive. The interest must be on a debt to buy, build,

copy of this form will also be sent to the IRS.

mortgage on which there are other borrowers

change, improve, or maintain the cooperative’s

The statement will show the total interest you

entitled to a deduction for the interest shown on

housing, or on a debt to buy the land.

paid during the year. If you purchased a main

the Form 1098 you received, deduct only your

home during the year, it also will show the de-

Figure your share of this interest by multiply-

share of the interest on line 10 of Schedule A

ductible points paid during the year, including

ing the total by the following fraction.

(Form 1040). You should let each of the other

seller-paid points. However, it should not show

borrowers know what his or her share is.

Your shares of stock in the

any interest that was paid for you by a govern-

cooperative

ment agency.

Mortgage proceeds used for business or

The total shares of stock in the

As a general rule, Form 1098 will include

investment. If your home mortgage interest

cooperative

only points that you can fully deduct in the year

deduction is limited under the rules explained in

Page 7

Publication 936 - Home Mortgage Interest Deduction - 2003 Page 7

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