Publication 936 - Home Mortgage Interest Deduction

Example 1. When you took out a $100,000

purchase or improvement of that home. He can-

fee. The funding fee and guarantee fee can

not deduct all of the points in 2011. He can

mortgage loan to buy your home in December,

either be included in the amount of the loan or

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

you were charged one point ($1,000). You meet

paid in full at the time of closing. These fees can

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

all the tests for deducting points in the year paid,

be deducted fully in 2011 if the mortgage insur-

months) × 6 payments] of the points in 2011.

except the only funds you provided were a $750

ance contract was issued in 2011. Contact the

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

down payment. Of the $1,000 charged for

mortgage insurance issuer to determine the de-

and is not deductible.

points, you can deduct $750 in the year paid.

ductible amount if it is not reported in box 4 of

You spread the remaining $250 over the life of

Form 1098.

Example 2. The facts are the same as in

the mortgage.

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

Special rules for prepaid mortgage insur-

Example 2. The facts are the same as in

ance. Generally, if you paid premiums for

loan proceeds to improve his home and $75,000

to repay his existing mortgage. Bill deducts 25%

Example 1, except that the person who sold you

qualified mortgage insurance that are properly

($25,000 ÷ $100,000) of the points ($2,000) in

your home also paid one point ($1,000) to help

allocable to periods after the close of the tax

2011. His deduction is $500 ($2,000 × 25%).

you get your mortgage. In the year paid, you can

year, such premiums are treated as paid in the

Bill also deducts the ratable part of the re-

deduct $1,750 ($750 of the amount you were

period to which they are allocated. You must

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

charged plus the $1,000 paid by the seller). You

allocate the premiums over the shorter of the

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

spread the remaining $250 over the life of the

stated term of the mortgage or 84 months, be-

[($1,500 ÷ 180 months) × 6 payments] in 2011.

mortgage. You must reduce the basis of your

ginning with the month the insurance was ob-

The total amount Bill deducts in 2011 is $550

home by the $1,000 paid by the seller.

tained. No deduction is allowed for the

($500 + $50).

unamortized balance if the mortgage is satisfied

Excess points. If you meet all the tests in

before its term. This paragraph does not apply to

Deduction Allowed in Year

Paid, earlier, except

qualified mortgage insurance provided by the

that the points paid were more than generally

Special Situations

Department of Veterans Affairs or the Rural

paid in your area (test (3)), you deduct in the

Housing Service.

year paid only the points that are generally

This section describes certain special situations

charged. You must spread any additional points

that may affect your deduction of points.

Example. Ryan purchased a home in May

over the life of the mortgage.

of 2010 and financed the home with a 15-year

Original issue discount. If you do not qualify

mortgage. Ryan also prepaid all of the $9,240 in

Mortgage ending early. If you spread your

to either deduct the points in the year paid or

private mortgage insurance required at the time

deduction for points over the life of the mort-

deduct them ratably over the life of the loan, or if

of closing in May. Since the $9,240 in private

gage, you can deduct any remaining balance in

you choose not to use either of these methods,

mortgage insurance is allocable to periods after

the points reduce the issue price of the loan.

the year the mortgage ends. However, if you

2010, Ryan must allocate the $9,240 over the

refinance the mortgage with the same lender,

This reduction results in original issue discount,

shorter of the life of the mortgage or 84 months.

you cannot deduct any remaining balance of

which is discussed in chapter 4 of Publication

Ryan’s adjusted gross income (AGI) for 2010 is

535.

spread points. Instead, deduct the remaining

$76,000. Ryan can deduct $880 ($9,240 ÷ 84 ×

balance over the term of the new loan.

Amounts charged for services. Amounts

8 months) for qualified mortgage insurance pre-

A mortgage may end early due to a prepay-

charged by the lender for specific services con-

miums in 2010. For 2011, Ryan can deduct

ment, refinancing, foreclosure, or similar event.

nected to the loan are not interest. Examples of

$1,320 ($9,240 ÷ 84 × 12 months) if his AGI is

these charges are:

$100,000 or less.

Example. Dan paid $3,000 in points in 2000

•

that he had to spread out over the 15-year life of

In this example, the mortgage insurance pre-

Appraisal fees,

the mortgage. He deducts $200 points per year.

miums are allocated over 84 months, which is

•

Notary fees, and

Through 2010, Dan has deducted $2,200 of the

shorter than the life of the mortgage of 15 years

•

points.

(180 months).

Preparation costs for the mortgage note or

Dan prepaid his mortgage in full in 2011. He

deed of trust.

Limit on deduction. If your adjusted gross

can deduct the remaining $800 of points in 2011.

You cannot deduct these amounts as points

income on Form 1040, line 38, is more than

Limits on deduction. You cannot fully deduct

either in the year paid or over the life of the

$100,000 ($50,000 if your filing status is married

points paid on a mortgage that exceeds the

mortgage.

filing separately), the amount of your mortgage

limits discussed in

Part

II. See the Table 1 In-

insurance premiums that are otherwise deducti-

Points paid by the seller. The term “points”

structions for line 10.

ble is reduced and may be eliminated. See Line

includes loan placement fees that the seller

13 in the instructions for Schedule A (Form

Form 1098. The mortgage interest statement

pays to the lender to arrange financing for the

1040) and complete the Mortgage Insurance

you receive should show not only the total inter-

buyer.

Premiums Deduction Worksheet to figure the

est paid during the year, but also your deductible

amount you can deduct. If your adjusted gross

Treatment by seller. The seller cannot de-

points paid during the year. See

Form 1098,

income is more than $109,000 ($54,500 if mar-

duct these fees as interest. But they are a selling

Mortgage Interest

Statement, later.

ried filing separately), you cannot deduct your

expense that reduces the amount realized by

mortgage insurance premiums.

Mortgage Insurance

the seller. See Publication 523 for information

on selling your home.

Premiums

Form 1098. The mortgage interest statement

Treatment by buyer. The buyer reduces

you receive should show not only the total inter-

the basis of the home by the amount of the

You can treat amounts you paid during 2011 for

est paid during the year, but also your mortgage

qualified mortgage insurance as home mort-

seller-paid points and treats the points as if he or

insurance premiums paid during the year, which

she had paid them. If all the tests under

Deduc-

gage interest. The insurance must be in connec-

may qualify to be treated as deductible mort-

tion Allowed in Year

Paid, earlier, are met, the

tion with home acquisition debt, and the

gage interest. See

Form 1098, Mortgage Inter-

insurance contract must have been issued after

buyer can deduct the points in the year paid. If

est

Statement, next.

any of those tests are not met, the buyer deducts

2006.

the points over the life of the loan.

Form 1098, Mortgage Interest

Qualified mortgage insurance. Qualified

If you need information about the basis of

Statement

mortgage insurance is mortgage insurance pro-

your home, see Publication 523 or Publication

vided by the Department of Veterans Affairs, the

530.

If you paid $600 or more of mortgage interest

Federal Housing Administration, or the Rural

(including certain points and mortgage insur-

Funds provided are less than points. If you

Housing Service, and private mortgage insur-

meet all the tests in

Deduction Allowed in Year

ance (as defined in section 2 of the Homeown-

ance premiums) during the year on any one

mortgage, you generally will receive a Form

Paid, earlier, except that the funds you provided

ers Protection Act of 1998 as in effect on

were less than the points charged to you (test

December 20, 2006).

1098 or a similar statement from the mortgage

(6)), you can deduct the points in the year paid,

Mortgage insurance provided by the Depart-

holder. You will receive the statement if you pay

interest to a person (including a financial institu-

up to the amount of funds you provided. In addi-

ment of Veterans Affairs is commonly known as

tion, you can deduct any points paid by the

a funding fee. If provided by the Rural Housing

tion or cooperative housing corporation) in the

seller.

Service, it is commonly known as a guarantee

course of that person’s trade or business. A

Publication 936 (2011)

Page 7

Publication 936 - Home Mortgage Interest Deduction - 2011 Page 7

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