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Special Tax Situations Regarding Home Mortgage Interest

January 25, 2012 | Comments: 0 | Views: 53

Paying your mortgage bill can be quite a burden, but it does provide most homeowners with a nice income tax return, thanks to deductible home mortgage interest. There are certain items that can be included as home mortgage interest and others that cannot. There are also certain special situations that may affect your deduction. The special situations could impact your tax return, so it is important that you know the difference.

Late Payment Charge of Mortgage Payment. If the late payment charge was not for a specific service performed in connection with your mortgage loan, you can deduct the charge as home mortgage interest.

Mortgage Prepayment Penalty. You may have to pay a prepayment penalty if you pay off your home mortgage early. If the penalty was not for a specific service performed or cost incurred in connection with your mortgage loan, you may deduct the prepayment penalty as home mortgage interest.

Prepaid Interest. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. (See Points, discussed later, for an exception). Interest that you pay in advance for a period that goes beyond the end of the tax year must be spread out over the tax years to which it applies.

Mortgage Interest Credit. If you were issued a mortgage credit certificate (MCC) by a state or local government, you may be able to claim a mortgage interest credit. Use Form 8396, Mortgage Interest Credit, to figure the credit. You must reduce your mortgage interest deduction by the amount of the credit that you take.

Divorced or Separated Individuals. The payment of home mortgage interest may be considered alimony 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.

Reverse Mortgages. A reverse mortgage is a loan where a lender pays you while you continue to live in your home, while you retain title to your home. The payments can be in lump sum, a monthly advance, a line of credit, or a combination of all three. Generally, the reverse mortgage becomes due when you move, sell your home, reach the end of a pre-selected loan period, or die. The amount you receive is not taxable because reverse mortgages are considered loan advances, not income. Any interest accrued on a reverse mortgage is not deductible until the loan is paid in full, and may be limited.

Rental Payments. You cannot deduct as home interest any payments you make while living in a house before final settlement on the purchase. This is true even if the settlement papers call them interest.

Mortgage Proceeds Invested in Tax-Exempt Securities. You cannot deduct the interest on home equity debt if you used the proceeds to buy securities or certificates that produce tax-free income.


Please be advised that in order to ensure StrataTax's compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at for more information.

Source: EzineArticles
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