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previous page Previous Page: Publication 929 - Tax Rules for Children and Dependents - Tax for Certain Children Who Have Investment Income of More Than $1,800
next page Next Page: Publication 936 - Home Mortgage Interest Deduction - Part II. Limits on Home Mortgage Interest Deduction
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p936-000.htm#en_us_publink100037058
Publication 936

Home 
Mortgage 
Interest 
Deduction


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What's New(p1)


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taxmap/pubs/p936-000.htm#en_us_publink100037060

Cooperative housing corporation.(p1)

The definition of a cooperative housing corporation has changed. See Special Rule for Tenant-Stockholders in Cooperative Housing Corporations.
taxmap/pubs/p936-000.htm#en_us_publink100037061

Limit on itemized deductions.(p1)

Certain itemized deductions (including home mortgage interest) are limited if your adjusted gross income is more than $159,950 ($79,975 if you are married filing separately). For more information, see the instructions for Schedule A (Form 1040).

Reminders(p1)


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taxmap/pubs/p936-000.htm#en_us_publink100037063

Photographs of missing children.(p1)

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

taxmap/pubs/p936-000.htm#TXMP68effd5bIntroduction

This publication discusses the rules for deducting home mortgage interest.
Part I contains general information on home mortgage interest, including points and mortgage insurance premiums. It also explains how to report deductible interest on your tax return.
Part II explains how your deduction for home mortgage interest may be limited. It contains Table 1, which is a worksheet you can use to figure the limit on your deduction.
taxmap/pubs/p936-000.htm#en_us_publink100037064

Comments and suggestions.(p2)


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We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:

 
Internal Revenue Service 
Individual Forms and Publications Branch 
SE:W:CAR:MP:T:I 
1111 Constitution Ave. NW, IR-6526 
Washington, DC 20224


We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.
You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.
taxmap/pubs/p936-000.htm#en_us_publink100037065

Ordering forms and publications.(p2)
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Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

 
Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613


taxmap/pubs/p936-000.htm#en_us_publink100037066

Tax questions.(p2)
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If you have a tax question, check the information available on www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

taxmap/pubs/p936-000.htm#TXMP7c2d28cb

Useful items

You may want to see:


Publication
 523 Selling Your Home
 527 Residential Rental Property
 530 Tax Information for First-Time Homeowners
 535 Business Expenses
See How To Get Tax Help, near the end of this publication, for information about getting these publications.
taxmap/pubs/p936-000.htm#en_us_publink100037067

Part I. Home 
Mortgage Interest(p2)


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previous topic occurrence Itemized Deduction, Home Mortgage Interest next topic occurrence

This part explains what you can deduct as home mortgage interest. It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return.
Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
You can deduct home mortgage interest if all the following conditions are met.  
You cannot deduct interest you pay for someone else if you are not legally liable to pay it. Both you and the lender must intend that the loan be repaid.
taxmap/pubs/p936-000.htm#en_us_publink100037068

Fully deductible interest.(p2)


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In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.
If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct.
The three categories are as follows.
  1. Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
  2. Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2008 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
  3. Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2008 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).
The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.
See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt.
You can use Figure A to check whether your home mortgage interest is fully deductible. taxmap/pubs/p936-000.htm#en_us_publink100037069
taxmap/pubs/p936-000.htm#TXMP6a282827
Figure A. Is My Home Mortgage Interest Fully Deductible? Text DescriptionFigure A. Is My Home Mortgage Interest Fully Deductible?  
taxmap/pubs/p936-000.htm#en_us_publink100037070

Secured Debt(p2)


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Secured Debt

You can deduct your home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:
  • Makes your ownership in a qualified home security for payment of the debt,
  • Provides, in case of default, that your home could satisfy the debt, and
  • Is recorded or is otherwise perfected under any state or local law that applies.
In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. In this publication, mortgage will refer to secured debt.
taxmap/pubs/p936-000.htm#en_us_publink100037071

Debt not secured by home.(p2)


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A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien).
A debt is not secured by your home if it once was, but is no longer secured by your home.
taxmap/pubs/p936-000.htm#en_us_publink100037072

Wraparound mortgage.(p2)
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This is not a secured debt unless it is recorded or otherwise perfected under state law.
taxmap/pubs/p936-000.htm#en_us_publink100037073

Example.(p2)

Beth owns a home subject to a mortgage of $40,000. She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Beth continues to make the payments on the $40,000 note. John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest.
taxmap/pubs/p936-000.htm#en_us_publink100037074

Choice to treat the debt as not secured by your home.(p2)


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You can choose to treat any debt secured by your qualified home as not secured by the home. This treatment begins with the tax year for which you make the choice and continues for all later tax years. You can revoke your choice only with the consent of the Internal Revenue Service (IRS).
You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest.
taxmap/pubs/p936-000.htm#en_us_publink100037075

Cooperative apartment owner.(p2)


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If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations, near the end of this Part I.
taxmap/pubs/p936-000.htm#en_us_publink100037076

Qualified Home(p2)


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previous topic occurrence Qualified Home next topic occurrence

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.
The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.
taxmap/pubs/p936-000.htm#en_us_publink100037077

Main home.(p2)


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You can have only one main home at any one time. This is the home where you ordinarily live most of the time.
taxmap/pubs/p936-000.htm#en_us_publink100037078

Second home.(p2)


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A second home is a home that you choose to treat as your second home.
taxmap/pubs/p936-000.htm#en_us_publink100037079

Second home not rented out.(p2)
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If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.
taxmap/pubs/p936-000.htm#en_us_publink100037080

Second home rented out.(p2)
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If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.
taxmap/pubs/p936-000.htm#en_us_publink100037081

More than one second home.(p3)
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If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home during the year in the following situations.
  • If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it.
  • If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home.
  • If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home.
taxmap/pubs/p936-000.htm#en_us_publink100037082

Divided use of your home.(p3)


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The only part of your home that is considered a qualified home is the part you use for residential living. If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. (See Home Acquisition Debt in Part II.) Dividing the fair market value may affect your home equity debt limit, also explained in Part II.
taxmap/pubs/p936-000.htm#en_us_publink100037083

Renting out part of home.(p4)
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If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply.
  • The rented part of your home is used by the tenant primarily for residential living.
  • The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.
  • You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.
taxmap/pubs/p936-000.htm#en_us_publink100037084

Office in home.(p4)
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If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest.
taxmap/pubs/p936-000.htm#en_us_publink100037085

Home under construction.(p4)


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You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.
The 24-month period can start any time on or after the day construction begins.
taxmap/pubs/p936-000.htm#en_us_publink100037086

Home destroyed.(p4)


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You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication.
You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you:
  • Rebuild the destroyed home and move into it, or
  • Sell the land on which the home was located.
This rule applies to your main home and to a second home that you treat as a qualified home.
taxmap/pubs/p936-000.htm#en_us_publink100037087

Time-sharing arrangements.(p4)


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You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year.
taxmap/pubs/p936-000.htm#en_us_publink100037088

Rental of time-share.(p4)
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If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. See Second home rented out, earlier, for the use requirement. To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it.
taxmap/pubs/p936-000.htm#en_us_publink100037089

Married taxpayers.(p4)


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If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse.
taxmap/pubs/p936-000.htm#en_us_publink100037090

Separate returns.(p4)
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If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. However, if you both consent in writing, then one spouse can take both the main home and a second home into account.
taxmap/pubs/p936-000.htm#en_us_publink100037091

Special Situations(p4)


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This section describes certain items that can be included as home mortgage interest and others that cannot. It also describes certain special situations that may affect your deduction.
taxmap/pubs/p936-000.htm#en_us_publink100037092

Late payment charge on mortgage payment.(p4)


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You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.
taxmap/pubs/p936-000.htm#en_us_publink100037093

Mortgage prepayment penalty.(p4)


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If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.
taxmap/pubs/p936-000.htm#en_us_publink100037094

Sale of home.(p4)


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If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.
taxmap/pubs/p936-000.htm#en_us_publink100037095

Example.(p4)

John and Peggy Harris sold their home on May 7. Through April 30, they made home mortgage interest payments of $1,220. The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Their mortgage interest deduction is $1,270 ($1,220 + $50).
taxmap/pubs/p936-000.htm#en_us_publink100037096

Prepaid interest.(p4)


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If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, discussed later.
taxmap/pubs/p936-000.htm#en_us_publink100037097

Mortgage interest credit.(p4)


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You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Figure the credit on Form 8396, Mortgage Interest Credit. If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit.
See Form 8396 and Publication 530 for more information on the mortgage interest credit.
taxmap/pubs/p936-000.htm#en_us_publink100037098

Ministers' and military housing allowance.(p4)


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If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest.
taxmap/pubs/p936-000.htm#en_us_publink100037099

Mortgage assistance payments.(p4)


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If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. You cannot deduct the interest that is paid for you.
taxmap/pubs/p936-000.htm#en_us_publink100037100

No other effect on taxes.(p4)
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Do not include these mortgage assistance payments in your income. Also, do not use these payments to reduce other deductions, such as real estate taxes.
taxmap/pubs/p936-000.htm#en_us_publink100037101

Divorced or separated individuals.(p4)


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If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals.
taxmap/pubs/p936-000.htm#en_us_publink100037102

Redeemable ground rents.(p4)


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In some states (such as Maryland), you can buy your home subject to a ground rent. A ground rent is an obligation you assume to pay a fixed amount per year on the property. Under this arrangement, you are leasing (rather than buying) the land on which your home is located.
If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest.
A ground rent is a redeemable ground rent if all of the following are true.
  • Your lease, including renewal periods, is for more than 15 years.
  • You can freely assign the lease.
  • You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specific amount.
  • The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled.
Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest.
taxmap/pubs/p936-000.htm#en_us_publink100037103

Nonredeemable ground rents.(p4)
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Payments on a nonredeemable ground rent are not mortgage interest. You can deduct them as rent if they are a business expense or if they are for rental property.
taxmap/pubs/p936-000.htm#en_us_publink100044330

Reverse Mortgages.(p4)


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A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II.
taxmap/pubs/p936-000.htm#en_us_publink100037104

Rental payments.(p4)


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If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. This is true even if the settlement papers call them interest. You cannot deduct these payments as home mortgage interest.
taxmap/pubs/p936-000.htm#en_us_publink100037105

Mortgage proceeds invested in tax-exempt securities.(p4)


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You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. "Grandfathered debt" and "home equity debt" are defined in Part II of this publication.
taxmap/pubs/p936-000.htm#en_us_publink100037106

Refunds of interest.(p4)


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If you receive a refund of interest in the same year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. If you need to include the refund in income, report it on Form 1040, line 21.
If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. For information about Form 1098, see Form 1098, Mortgage Interest Statement, later.
For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income.
taxmap/pubs/p936-000.htm#en_us_publink100037107

Cooperative apartment owner.(p5)
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If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year.
If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct.
taxmap/pubs/p936-000.htm#en_us_publink100037108

Points(p5)


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previous topic occurrence Loan Origination Fee next topic occurrence

The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. taxmap/pubs/p936-000.htm#en_us_publink100037109
taxmap/pubs/p936-000.htm#TXMP7cb472ee
Figure B. Are My Points Fully Deductible This Year? Text DescriptionFigure B. Are My Points Fully Deductible This Year?  
A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. See Points paid by the seller, later.
taxmap/pubs/p936-000.htm#en_us_publink100037110

General Rule(p5)


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You generally cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. See Deduction Allowed Ratably, next.
For exceptions to the general rule, see Deduction Allowed in Year Paid, later.
taxmap/pubs/p936-000.htm#en_us_publink100037111

Deduction Allowed Ratably(p5)


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previous topic occurrence Deduction Allowed Ratably next topic occurrence

If you do not meet the tests listed under Deduction Allowed in Year Paid, later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests.
  1. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
  2. Your loan is secured by a home. (The home does not need to be your main home.)
  3. Your loan period is not more than 30 years.
  4. If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period.
  5. Either your loan amount is $250,000 or less, or the number of points is not more than:
    1. 4, if your loan period is 15 years or less, or
    2. 6, if your loan period is more than 15 years.
taxmap/pubs/p936-000.htm#en_us_publink100037112

Example.(p5)

You use the cash method of accounting. In 2008, you took out a $100,000 loan payable over 20 years. The terms of the loan are the same as for other 20-year loans offered in your area. You paid $4,800 in points. You made 3 monthly payments on the loan in 2008. You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2008. In 2009, if you make all twelve payments, you will be able to deduct $240 ($20 x 12).
taxmap/pubs/p936-000.htm#en_us_publink100037113

Deduction Allowed in Year Paid(p5)


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previous topic occurrence Deduction Allowed in Year Paid next topic occurrence

You can fully deduct points in the year paid if you meet all the following tests. (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid.)
  1. Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid were not more than the points generally charged in that area.
  4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
  5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
  7. You use your loan to buy or build your main home.
  8. The points were computed as a percentage of the principal amount of the mortgage.
  9. The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.
Note.If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan.
taxmap/pubs/p936-000.htm#en_us_publink100037115

Home improvement loan.(p5)


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You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met.
EIC
Second home. You cannot fully deduct in the year paid points you pay on loans secured by your second home. You can deduct these points only over the life of the loan.
taxmap/pubs/p936-000.htm#en_us_publink100037117

Refinancing.(p5)


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Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. This is true even if the new mortgage is secured by your main home.
However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.
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Example 1.(p5)

In 1994, Bill Fields got a mortgage to buy a home. In 2008, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. The mortgage is secured by his home. To get the new loan, he had to pay three points ($3,000). Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Bill's first payment on the new loan was due July 1. He made six payments on the loan in 2008 and is a cash basis taxpayer.
Bill used the funds from the new mortgage to repay his existing mortgage. Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. He cannot deduct all of the points in 2008. He can deduct two points ($2,000) ratably over the life of the loan. He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2008. The other point ($1,000) was a fee for services and is not deductible.
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Example 2.(p5)

The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2008. His deduction is $500 ($2,000 × 25%).
Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2008. The total amount Bill deducts in 2008 is $550 ($500 + $50).
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Special Situations(p5)


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This section describes certain special situations that may affect your deduction of points.
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Original issue discount.(p5)


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If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535.
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Amounts charged for services.(p7)


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Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are:
  • Appraisal fees,
  • Notary fees, and
  • Preparation costs for the mortgage note or deed of trust.
You cannot deduct these amounts as points either in the year paid or over the life of the mortgage.
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Points paid by the seller.(p7)


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The term "points" includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.
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Treatment by seller.(p7)
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The seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller. See Publication 523 for information on selling your home.
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Treatment by buyer.(p7)
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The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. If all the tests under Deduction Allowed in Year Paid, earlier, are met, the buyer can deduct the points in the year paid. If any of those tests are not met, the buyer deducts the points over the life of the loan.
If you need information about the basis of your home, see Publication 523 or Publication 530.
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Funds provided are less than points.(p7)


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If you meet all the tests in Deduction Allowed in Year Paid, earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. In addition, you can deduct any points paid by the seller.
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Example 1.(p7)

When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Of the $1,000 charged for points, you can deduct $750 in the year paid. You spread the remaining $250 over the life of the mortgage.
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Example 2.(p7)

The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). You spread the remaining $250 over the life of the mortgage. You must reduce the basis of your home by the $1,000 paid by the seller.
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Excess points.(p7)


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If you meet all the tests in Deduction Allowed in Year Paid, earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.
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Mortgage ending early.(p7)


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If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.
A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.
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Example.(p7)

Dan paid $3,000 in points in 1997 that he had to spread out over the 15-year life of the mortgage. He deducts $200 points per year. Through 2007, Dan has deducted $2,200 of the points.
Dan prepaid his mortgage in full in 2008. He can deduct the remaining $800 of points in 2008.
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Limits on deduction.(p7)


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You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II. See the Table 1 Instructions for line 10.
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Form 1098.(p7)


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The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. See Form 1098, Mortgage Interest Statement, later.
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Mortgage Insurance Premiums(p7)


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previous topic occurrence Mortgage Insurance Premiums next topic occurrence

You can treat amounts you paid during 2008 for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.
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Qualified mortgage insurance.(p7)


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Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).
Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. If provided by the Rural Housing Service, it is commonly known as a guarantee fee. The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. These fees can be deducted fully in 2008 if the mortgage insurance contract was issued in 2008. Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098.
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Special rules for prepaid mortgage insurance.(p7)


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If you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service).
At the time this publication went to print, regulations were being considered that would allow you to allocate qualified mortgage insurance premiums paid in connection with a mortgage obtained after 2006 over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained.
More information can be found in Publication 553, Highlights of 2008 Tax Changes which is available at www.irs.gov/formspubs. Information on this and other changes affecting individual taxpayers can also be found at www.irs.gov/formspubs. Click on Highlights of Recent Tax Changes and then on Individuals.
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Limit on deduction.(p7)


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If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. See Line 13 in the instructions for Schedule A (Form 1040) and complete the Qualified Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums.
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Form 1098.(p7)


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The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. See Form 1098, Mortgage Interest Statement, next.
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Form 1098, Mortgage Interest Statement(p7)


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If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 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 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.
The statement for each year should be sent to you 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, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will 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 the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098.
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Prepaid interest on Form 1098.(p7)


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If you prepaid interest in 2008 that accrued in full by January 15, 2009, this prepaid interest may be included in box 1 of Form 1098. However, you cannot deduct the prepaid amount for January 2009 in 2008. (See Prepaid interest, earlier.) You will have to figure the interest that accrued for 2009 and subtract it from the amount in box 1. You will include the interest for January 2009 with other interest you pay for 2009.
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Refunded interest.(p7)


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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.
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Mortgage insurance premiums.(p7)


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The amount of mortgage insurance premiums you paid during 2008 may be shown in box 4 of Form 1098. See Mortgage Insurance Premiums, earlier.
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How To Report(p8)


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Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 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 Schedule A (Form 1040), line 11. 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, Request for Taxpayer Identification Number and Certification, 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.
If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12.
Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13.
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More than one borrower.(p8)


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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 Schedule A (Form 1040), line 11, and print "See attached" next to the line. Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13.
Similarly, 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 Schedule A (Form 1040), line 10. You should let each of the other borrowers know what his or her share is.
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Mortgage proceeds used for business or investment.(p8)


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If your home mortgage interest deduction is limited under the rules explained in Part II, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. It shows where to deduct the part of your excess interest that is for those activities. The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used.
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Special Rule for Tenant-Stockholders in Cooperative Housing Corporations(p8)


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Special Rule for Tenant-Stockholders in Cooperative Housing Corporations

A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative.
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Cooperative housing corporation.(p8)


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This is a corporation that meets all of the following conditions.
  1. Has only one class of stock outstanding,
  2. Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation,
  3. Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and
  4. Meets at least one of the following requirements.
    1. Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership.
    2. At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use.
    3. At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders.
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Stock used to secure debt.(p8)


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In some cases, you cannot use your cooperative housing stock to secure a debt because of either:
  • Restrictions under local or state law, or
  • Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- 
    stockholder to treat unsecured debt as secured debt).
However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. See chapter 4 of Publication 535 for details on these rules.
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Figuring deductible home mortgage interest.(p8)


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Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land.
Figure your share of this interest by multiplying the total by the following fraction.
 Your shares of stock in the cooperative 
The total shares of stock in the cooperative
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Limits on deduction.(p8)
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To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given.) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock.
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Form 1098.(p8)
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The cooperative should give you a Form 1098 showing your share of the interest. Use the rules in this publication to determine your deductible mortgage interest.
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