Publication 936 - Home Mortgage Interest Deduction - Department Of Treasury - 2004 Page 4
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16ing, such as a home office, you must allocate the
requirement. To know whether you meet that
National Housing Act, part or all of the interest
use of your home. You must then divide both the
requirement, count your days of use and rental
on your mortgage may be paid for you. You
cost and fair market value of your home between
of the home only during the time you have a right
cannot deduct the interest that is paid for you.
the part that is a qualified home and the part that
to use it or to receive any benefits from the rental
No other effect on taxes. Do not include
is not. Dividing the cost may affect the amount of
of it.
these mortgage assistance payments in your
your home acquisition debt, which is limited to
income. Also, do not use these payments to
Married taxpayers. If you are married and file
the cost of your home plus the cost of any
reduce other deductions, such as real estate
a joint return, your qualified home(s) can be
improvements. (See Home Acquisition Debt in
taxes.
owned either jointly or by only one spouse.
Part II.) Dividing the fair market value may affect
your home equity debt limit, also explained in
Separate returns. If you are married filing
Divorced or separated individuals. If a di-
Part II.
separately and you and your spouse own more
vorce or separation agreement requires you or
than one home, you can each take into account
your spouse or former spouse to pay home
Renting out part of home. If you rent out
only one home as a qualified home. However, if
mortgage interest on a home owned by both of
part of a qualified home to another person (ten-
you both consent in writing, then one spouse
you, the payment of interest may be alimony.
ant), you can treat the rented part as being used
can take both the main home and a second
See the discussion of Payments for
by you for residential living only if all of the
home into account.
jointly-owned home under Alimony in Publica-
following conditions apply.
tion 504, Divorced or Separated Individuals.
•
The rented part of your home is used by
Special Situations
Redeemable ground rents. In some states
the tenant primarily for residential living.
(such as Maryland), you may buy your home
•
This section describes certain items that can be
The rented part of your home is not a
subject to a ground rent. A ground rent is an
included as home mortgage interest and others
self-contained residential unit having sep-
obligation you assume to pay a fixed amount per
that cannot. It also describes certain special
arate sleeping, cooking, and toilet facili-
year on the property. Under this arrangement,
situations that may affect your deduction.
ties.
you are leasing (rather than buying) the land on
•
Late payment charge on mortgage payment.
which your home is located.
You do not rent (directly or by sublease)
You can deduct as home mortgage interest a
If you make annual or periodic rental pay-
the same or different parts of your home to
late payment charge if it was not for a specific
ments on a redeemable ground rent, you can
more than two tenants at any time during
service in connection with your mortgage loan.
deduct them as mortgage interest.
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
•
a penalty. You can deduct that penalty as home
Your lease, including renewal periods, is
Office in home. If you have an office in your
mortgage interest provided the penalty is not for
for more than 15 years.
home that you use in your business, see Publi-
a specific service performed or cost incurred in
•
You can freely assign the lease.
cation 587, Business Use of Your Home. It ex-
connection with your mortgage loan.
•
plains how to figure your deduction for the
You have a present or future right (under
Sale of home. If you sell your home, you can
business use of your home, which includes the
state or local law) to end the lease and
deduct your home mortgage interest (subject to
business part of your home mortgage interest.
buy the lessor’s entire interest in the land
any limits that apply) paid up to, but not includ-
by paying a specific amount.
Home under construction. You can treat a
ing, the date of the sale.
•
home under construction as a qualified home for
The lessor’s interest in the land is primarily
a period of up to 24 months, but only if it be-
a security interest to protect the rental
Example. John and Peggy Harris sold their
comes your qualified home at the time it is ready
payments to which he or she is entitled.
home on May 7. Through April 30, they made
for occupancy.
home mortgage interest payments of $1,220.
The 24-month period can start any time on or
Payments made to end the lease and to buy
The settlement sheet for the sale of the home
after the day construction begins.
the lessor’s entire interest in the land are not
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-
mortgage interest deduction is $1,270 ($1,220 +
tinue treating your home as a qualified home
Nonredeemable ground rent. Payments
$50).
even after it is destroyed in a fire, storm, tor-
on a nonredeemable ground rent are not mort-
nado, earthquake, or other casualty. This means
gage interest. You can deduct them as rent if
Prepaid interest. If you pay interest in ad-
you can continue to deduct the interest you pay
they are a business expense or if they are for
vance for a period that goes beyond the end of
on your home mortgage, subject to the limits
rental property.
the tax year, you must spread this interest over
described in this publication.
the tax years to which it applies. You can deduct
Rental payments. If you live in a house before
You can continue treating a destroyed home
in each year only the interest that qualifies as
final settlement on the purchase, any payments
as a qualified home if, within a reasonable pe-
home mortgage interest for that year. However,
you make for that period are rent and not inter-
riod of time after the home is destroyed, you:
there is an exception that applies to points, dis-
est. This is true even if the settlement papers call
•
cussed later.
Rebuild the destroyed home and move
them interest. You cannot deduct these pay-
into it, or
ments as home mortgage interest.
Mortgage interest credit. You may be able to
•
claim a mortgage interest credit if you were
Sell the land on which the home was lo-
Mortgage proceeds invested in tax-exempt
issued a mortgage credit certificate (MCC) by a
cated.
securities. You cannot deduct the home mort-
state or local government. Figure the credit on
gage interest on grandfathered debt or home
Form 8396, Mortgage Interest Credit. If you take
This rule applies to your main home and to a
equity debt if you used the proceeds of the
this credit, you must reduce your mortgage inter-
second home that you treat as a qualified home.
mortgage to buy securities or certificates that
est deduction by the amount of the credit.
produce tax-free income. “Grandfathered debt”
Time-sharing arrangements. You can treat a
See Form 8396 and Publication 530 for more
and “home equity debt” are defined in Part II of
home you own under a time-sharing plan as a
information on the mortgage interest credit.
this publication.
qualified home if it meets all the requirements. A
Ministers’ and military housing allowance.
time-sharing plan is an arrangement between
Refunds of interest. If you receive a refund of
If you are a minister or a member of the uni-
two or more people that limits each person’s
interest in the same year you paid it, you must
formed services and receive a housing allow-
interest in the home or right to use it to a certain
reduce your interest expense by the amount
ance that is not taxable, you can still deduct your
part of the year.
refunded to you. If you receive a refund of inter-
home mortgage interest.
Rental of time-share. If you rent out your
est you deducted in an earlier year, you gener-
time-share, it qualifies as a second home only if
Mortgage assistance payments. If you qual-
ally must include the refund in income in the year
you also use it as a home during the year. See
ify for mortgage assistance payments for
you receive it. However, you need to include it
Second home rented out, earlier, for the use
lower-income families under section 235 of the
only up to the amount of the deduction that
Page 4
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