Home Mortgage Interest Deductions: Are You Deducting More than You Should?

If you think all of the interest you’ve paid on your home mortgage is deductible on your income tax return, think again.

For many taxpayers, the interest home mortgage lenders report on Form 1098 is not deductible. The IRS has imposed new reporting requirements for lenders that will enable the IRS to identify taxpayers who are deducting more than they should.

Only interest on up to $1 million of acquisition debt and up to $100,000 of equity debt secured by the taxpayer’s primary residence and a designated second residence is deductible. “Acquisition debt” is debt used to acquire or substantially improve the taxpayer’s primary or second home. “Equity debt” is debt that is not used to acquire or substantially improve one of those residences. Equity debt interest is not deductible against the alternative minimum tax higher income taxpayers often encounter.

To find taxpayers deducting more home mortgage interest than they are entitled to, the IRS is requiring lenders to report the following information on Form 1098.

• Loan Initiation Date. Used to determine if the loan is a refinanced loan and the interest being deducted is potentially in excess of the acquisition and equity debt limits.
• Mortgage Balance on the First Day of the Tax Year. Also used to determine if the interest being deducted is in excess of the acquisition and equity debt limits. 
• Property Address of the Mortgage. Used to determine if the taxpayer is including interest from more than the allowed primary and one secondary residence. Also can be used to identify interest on motorhomes and boats, which can be deducted as home mortgage interest if the taxpayer uses the motorhome or boat as a primary or secondary home, but is not deductible against the AMT.

The IRS will conduct correspondence audits on taxpayers whose Form 1098 data indicates possible non-compliance. In addition, if you use home mortgages to finance rentals, businesses or other normally deductible uses but are allocating the interest between home mortgage interest and business or investment interest improperly, you may be subject to an IRS audit.

If you have questions regarding your compliance with the home mortgage interest deduction requirements or think you may not have been compliant in the past, please give us a call.