Mortgage Interest Statement
If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a
Form 1098, Mortgage Interest Statement, or a similar statement from the mortgage holder. You will receive the statement if you
pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. A
governmental unit is a person for purposes of furnishing the statement.
You should receive the statement for each year by January 31 of the following year. A copy of this form will also be sent to the IRS.
The statement will show the total interest you paid during the year. If you purchased a main home during the year, it will also show the deductible
points paid during the year, including seller-paid points. However, it should not show any interest that was paid for you by a government agency.
As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. However, certain points not included on Form 1098
also may be deductible, either in the year paid or over the life of the loan. See Points, earlier, to determine whether you can deduct
points not shown on Form 1098.
Prepaid interest on Form 1098.
If you prepaid interest in 2002 that accrued in full by January 15, 2003, this prepaid interest may be included in box 1 of Form 1098. However, you
cannot deduct the prepaid amount for January 2003 in 2002. (See Prepaid interest, earlier.) You will have to figure the interest that
accrued for 2003 and subtract it from the amount in box 1. You will include the interest for January 2003 with the other interest you pay for 2003.
See How To Report, later.
Refunded interest.
If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3.
See Refunds of interest, earlier.
Investment Interest
This section discusses the interest expenses you may be able to deduct as an investor.
If you borrow money to buy property you hold for investment, the interest you pay is investment interest. You can deduct investment interest
subject to the limit discussed later. However, you cannot deduct interest you incurred to produce tax-exempt income. Nor can you deduct interest
expenses on straddles.
Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a
passive activity.
Investment Property
Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a
trade or business. It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or
trade of property producing these types of income or held for investment (other than an interest in a passive activity). Investment property also
includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity).
Partners, shareholders, and beneficiaries.
To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your
other investment interest.
Allocation of Interest Expense
If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Only the interest
expense on the part of the debt used for investment purposes is treated as investment interest. The allocation is not affected by the use of property
that secures the debt.
Limit on Deduction
Generally, your deduction for investment interest expense is limited to the amount of your net investment income.
You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. The interest carried
over is treated as investment interest paid or accrued in that next year.
You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was
paid or accrued.
Net Investment Income
Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment
income.
Investment income.
This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Investment
income does not include Alaska Permanent Fund dividends.
Choosing to include net capital gain.
Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from
mutual funds). However, you can choose to include all or part of your net capital gain in investment income.
You make this choice by completing line 4e of Form 4952 according to its instructions.
If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the
lower capital gains tax rates by the same amount.
Before making this choice, consider the overall effect on your tax liability. Compare your tax if you make this choice with your tax if you do not.
Investment income of child reported on parent's return.
Investment income includes the part of your child's interest and dividend income that you choose to report on your return. If the child does not
have Alaska Permanent Fund dividends or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report
Child's Interest and Dividends.
Child's Alaska Permanent Fund dividends.
If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. To figure the
amount of your child's income that you can consider your investment income, start with the amount on line 6 of Form 8814. Multiply that amount by a
percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount of interest and dividend income on lines 1a and 2 of Form
8814. Subtract the result from the amount on line 6 of Form 8814.
Child's capital gain distributions.
If part of the amount you report is your child's capital gain distributions, that part (which is reported on line 13 of Schedule D or line 13 of
Form 1040) generally does not count as investment income. However, you can choose to include all or part of it in investment income. See chapter 3 of
Publication 550 to figure the amount to include.
Your investment income also includes the amount on line 6 of Form 8814 (or, if applicable, the amount figured under Child's Alaska Permanent
Fund dividends, earlier.
Investment expenses.
Investment expenses include all income-producing expenses (other than interest expense) relating to investment property that are allowable
deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Use the smaller of:
- The investment expenses included on line 22 of Schedule A (Form 1040), or
- The amount on line 26 of Schedule A.
Losses from passive activities.
Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or
investment expenses (including investment interest expense). See Publication 925, Passive Activity and At-Risk Rules, for information about
passive activities.
Form 4952
Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest.
Exception to use of Form 4952.
You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests.
- Your investment interest expense is not more than your investment income from interest and ordinary dividends.
- You have no other deductible investment expenses.
- You have no disallowed investment interest expense from 2001.
If you meet all of these tests, you can deduct all of your investment interest.
More Information
For more information on investment interest, see Investment Expenses in chapter 3 of Publication 550.
Items You Cannot Deduct
Some interest payments are not deductible. Certain expenses similar to interest also are not deductible. Nondeductible expenses include the
following items.
- Personal interest (discussed later).
- Service charges (however, see Other Expenses in chapter 30).
- Annual fees for credit cards.
- Loan fees.
- Credit investigation fees.
- FHA mortgage insurance premiums and VA funding fees.
- Interest to purchase or carry tax-exempt securities.
Penalties.
You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature.
Personal Interest
Personal interest is not deductible. Personal interest is any interest that is not home mortgage interest, investment interest, business interest,
or other deductible interest. It includes the following items.
- Interest on car loans (unless you use the car for business).
- Interest on federal, state, or local income tax.
- Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses.
- Late payment charges by a public utility.
You may be able to deduct interest you pay on a qualified student loan. For details, see Publication 970.
Allocation of Interest
If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to
each use. However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used.
You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. You do this
by tracing disbursements of the debt proceeds to specific uses. For details on how to do this, see chapter 5 of Publication 535.
How To Report
You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Where you deduct your interest expense generally depends
on how you use the loan proceeds. See Table 25-1 for a summary of where to deduct your interest expense.
Table 25-1. Where To Deduct Your Interest
| If you had the following type of interest expense ... |
&hand;Then you can deduct it on ... |
&hand;And you can find additional information in ... |
| Student loan interest |
Form 1040, line 25 or Form 1040A, line 18 |
Publication 970 |
| Deductible home mortgage interest and points reported on Form 1098 |
Schedule A (Form 1040), line 10 |
Publication 936 |
| Deductible home mortgage interest not reported on Form 1098 |
Schedule A (Form 1040), line 11 |
Publication 936 |
| Points not reported on Form 1098 |
Schedule A (Form 1040), line 12 |
Publication 936 |
| Investment interest (other than interest incurred to produce rents or royalties) |
Schedule A (Form 1040), line 13 |
Publication 550 |
| Business interest (non-farm) |
Schedule C or C-EZ (Form 1040) |
Publication 535 |
| Farm business interest |
Schedule F (Form 1040) |
Publications 225 and 535 |
| Interest incurred to produce rents or royalties |
Schedule E (Form 1040) |
Publications 527 and 535 |
| Personal interest |
Not Deductible |
Home mortgage interest and points.
Deduct the home mortgage interest and points reported to you on Form 1098 on line 10 of Schedule A (Form 1040). If you paid more deductible
interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Attach a statement explaining
the difference and print See attached next to line 10.
Deduct home mortgage interest that was not reported to you on Form 1098 on line 11 of Schedule A (Form 1040). If you paid home mortgage
interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines
next to line 11. The seller must give you this number and you must give the seller your TIN. A Form W-9 can be used for this purpose. Failure to
meet any of these requirements may result in a $50 penalty for each failure. The TIN can be either a social security number, an individual taxpayer
identification number (issued by the Internal Revenue Service), or an employer identification number. See Social Security Number in chapter
1 for more information about TINs.
If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on line 12 of Schedule A (Form
1040).
More than one borrower.
If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was
for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return
explaining this. Show how much of the interest each of you paid, and give the name and address of the person who received the form. Deduct your share
of the interest on line 11 of Schedule A (Form 1040), and print See attached next to the line.
If you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you
received, deduct only your share of the interest on line 10 of Schedule A (Form 1040). You should let each of the other borrowers know what his or her
share is.
Mortgage proceeds used for business or investment.
If your home mortgage interest deduction is limited but all or part of the mortgage proceeds were used for business, investment, or other
deductible activities, see Table 25-1. It shows where to deduct the part of your excess interest that is for those activities.
Investment interest.
Deduct investment interest, subject to certain limits discussed in Publication 550, on line 13 of Schedule A (Form 1040).
Amortization of bond premium.
There are various ways to treat the premium you pay to buy taxable bonds. See Bond Premium Amortization in Publication 550.
Income-producing rental or royalty interest.
Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040).
Example.
You rent out part of your home and borrow money to make repairs. You can deduct only the interest payment for the rented part in Part I of Schedule
E (Form 1040). Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest.
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