Publication 936 - Home Mortgage Interest Deduction

General Rule

a monthly advance, a line of credit, or a combi-

5. The points were not paid in place of

nation of all three) while you continue to live in

amounts that ordinarily are stated sepa-

You generally cannot deduct the full amount of

your home. With a reverse mortgage, you retain

rately on the settlement statement, such as

points in the year paid. Because they are pre-

title to your home. Depending on the plan, your

appraisal fees, inspection fees, title fees,

paid interest, you generally deduct them ratably

reverse mortgage becomes due with interest

attorney fees, and property taxes.

over the life (term) of the mortgage. See

Deduc-

when you move, sell your home, reach the end

6. The funds you provided at or before clos-

tion Allowed

Ratably, next.

of a pre-selected loan period, or die. Because

ing, plus any points the seller paid, were at

For exceptions to the general rule, see

De-

reverse mortgages are considered loan ad-

least as much as the points charged. The

duction Allowed in Year

Paid, later.

vances and not income, the amount you receive

funds you provided do not have to have

is not taxable. Any interest (including original

been applied to the points. They can in-

issue discount) accrued on a reverse mortgage

clude a down payment, an escrow deposit,

Deduction Allowed Ratably

is not deductible until you actually pay it, which is

earnest money, and other funds you paid

usually when you pay off the loan in full. Your

at or before closing for any purpose. You

If you do not meet the tests listed under

Deduc-

deduction may be limited because a reverse

cannot have borrowed these funds from

tion Allowed in Year

Paid, later, the loan is not a

mortgage loan generally is subject to the limit on

your lender or mortgage broker.

home improvement loan, or you choose not to

Home Equity Debt

discussed in Part II.

deduct your points in full in the year paid, you

7. You use your loan to buy or build your

can deduct the points ratably (equally) over the

Rental payments. If you live in a house before

main home.

life of the loan if you meet all the following tests.

final settlement on the purchase, any payments

8. The points were computed as a percent-

you make for that period are rent and not inter-

1. You use the cash method of accounting.

age of the principal amount of the mort-

est. This is true even if the settlement papers call

This means you report income in the year

gage.

them interest. You cannot deduct these pay-

you receive it and deduct expenses in the

ments as home mortgage interest.

9. The amount is clearly shown on the settle-

year you pay them. Most individuals use

ment statement (such as the Settlement

Mortgage proceeds invested in tax-exempt

this method.

Statement, Form HUD-1) as points

securities. You cannot deduct the home mort-

2. Your loan is secured by a home. (The

charged for the mortgage. The points may

gage interest on grandfathered debt or home

home does not need to be your main

be shown as paid from either your funds or

equity debt if you used the proceeds of the

home.)

the seller’s.

mortgage to buy securities or certificates that

produce tax-free income. “Grandfathered debt”

3. Your loan period is not more than 30

and “home equity debt” are defined in

Part II

years.

Note. If you meet all of these tests, you can

this publication.

choose to either fully deduct the points in the

4. If your loan period is more than 10 years,

year paid, or deduct them over the life of the

Refunds of interest. If you receive a refund of

the terms of your loan are the same as

loan.

interest in the same tax year you paid it, you

other loans offered in your area for the

same or longer period.

must reduce your interest expense by the

Home improvement loan. You can also fully

amount refunded to you. If you receive a refund

5. Either your loan amount is $250,000 or

deduct in the year paid points paid on a loan to

of interest you deducted in an earlier year, you

less, or the number of points is not more

improve your main home, if tests (1) through (6)

generally must include the refund in income in

than:

are met.

the year you receive it. However, you need to

include it only up to the amount of the deduction

Second home. You cannot fully de-

a. 4, if your loan period is 15 years or less,

that reduced your tax in the earlier year. This is

duct in the year paid points you pay on

true whether the interest overcharge was re-

loans secured by your second home.

CAUTION

b. 6, if your loan period is more than 15

funded to you or was used to reduce the out-

You can deduct these points only over the life of

years.

standing principal on your mortgage. If you need

the loan.

to include the refund in income, report it on Form

Refinancing. Generally, points you pay to

1040, line 21.

refinance a mortgage are not deductible in full in

Example. You use the cash method of ac-

If you received a refund of interest you over-

the year you pay them. This is true even if the

counting. In 2011, you took out a $100,000 loan

paid in an earlier year, you generally will receive

new mortgage is secured by your main home.

payable over 20 years. The terms of the loan are

a Form 1098, Mortgage Interest Statement,

However, if you use part of the refinanced

the same as for other 20-year loans offered in

showing the refund in box 3. For information

mortgage proceeds to improve your main home

your area. You paid $4,800 in points. You made

about Form 1098, see

Form 1098, Mortgage

and you meet the first 6 tests listed under

De-

3 monthly payments on the loan in 2011. You

Interest

Statement, later.

duction Allowed in Year

Paid, you can fully de-

can deduct $60 [($4,800 ÷ 240 months) x 3

For more information on how to treat refunds

duct the part of the points related to the

payments] in 2011. In 2012, if you make all

of interest deducted in earlier years, see Recov-

improvement in the year you paid them with your

twelve payments, you will be able to deduct

eries in Publication 525, Taxable and Nontax-

own funds. You can deduct the rest of the points

$240 ($20 x 12).

able Income.

over the life of the loan.

Cooperative apartment owner. If you own

Deduction Allowed in Year Paid

Example 1. In 1997, Bill Fields got a mort-

a cooperative apartment, you must reduce your

gage to buy a home. In 2011, Bill refinanced that

home mortgage interest deduction by your

You can fully deduct points in the year paid if you

mortgage with a 15-year $100,000 mortgage

share of any cash portion of a patronage divi-

meet all the following tests. (You can use Figure

loan. The mortgage is secured by his home. To

dend that the cooperative receives. The patron-

B as a quick guide to see whether your points

get the new loan, he had to pay three points

age dividend is a partial refund to the

are fully deductible in the year paid.)

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

cooperative housing corporation of mortgage in-

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

terest it paid in a prior year.

1. Your loan is secured by your main home.

services, in place of amounts that ordinarily are

If you receive a Form 1098 from the coopera-

(Your main home is the one you ordinarily

stated separately on the settlement statement.

tive housing corporation, the form should show

live in most of the time.)

Bill paid the points out of his private funds, rather

only the amount you can deduct.

than out of the proceeds of the new loan. The

2. Paying points is an established business

Points

payment of points is an established practice in

practice in the area where the loan was

the area, and the points charged are not more

made.

than the amount generally charged there. Bill’s

The term “points” is used to describe certain

3. The points paid were not more than the

first payment on the new loan was due July 1.

charges paid, or treated as paid, by a borrower

points generally charged in that area.

He made six payments on the loan in 2011 and

to obtain a home mortgage. Points may also be

is a cash basis taxpayer.

called loan origination fees, maximum loan

4. You use the cash method of accounting.

charges, loan discount, or discount points.

This means you report income in the year

Bill used the funds from the new mortgage to

A borrower is treated as paying any points

you receive it and deduct expenses in the

repay his existing mortgage. Although the new

that a home seller pays for the borrower’s mort-

year you pay them. Most individuals use

mortgage loan was for Bill’s continued owner-

gage. See

Points paid by the

seller, later.

this method.

ship of his main home, it was not for the

Publication 936 (2011)

Page 5

Publication 936 - Home Mortgage Interest Deduction - 2011 Page 5

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