Publication 936 - Home Mortgage Interest Deduction

Figure C.

Limits on deduction. To figure how the lim-

acquisition debt, but may qualify as home equity

its discussed in Part II apply to you, treat your

debt (discussed later).

Home

share of the cooperative’s debt as debt incurred

John

Completed

by you. The cooperative should determine your

Mortgage that qualifies later. A mortgage

Starts

($45,000 in

$36,000

share of its grandfathered debt, its home acqui-

that does not qualify as home acquisition debt

Building

Personal

Mortgage

sition debt, and its home equity debt. (Your

because it does not meet all the requirements

Home

Funds Used)

Taken Out

share of each of these types of debt is equal to

may qualify at a later time. For example, a debt

the average balance of each debt multiplied by

that you use to buy your home may not qualify

the fraction just given.) After your share of the

as home acquisition debt because it is not se-

Jan. 31

Oct. 31

Nov. 21

average balance of each type of debt is deter-

cured by the home. However, if the debt is later

mined, you include it with the average balance of

secured by the home, it may qualify as home

that type of debt secured by your stock.

acquisition debt after that time. Similarly, a debt

Form 1098. The cooperative should give

that you use to buy property may not qualify

9 Months

22 Days

you a Form 1098 showing your share of the

because the property is not a qualified home.

(Within 24 Months)

(Within 90 Days)

interest. Use the rules in this publication to de-

However, if the property later becomes a quali-

termine your deductible mortgage interest.

fied home, the debt may qualify after that time.

Date of the mortgage. The date you take

Mortgage treated as used to buy, build, or

out your mortgage is the day the loan proceeds

improve home. A mortgage secured by a

Part II. Limits on

are disbursed. This is generally the closing date.

qualified home may be treated as home acquisi-

You can treat the day you apply in writing for

tion debt, even if you do not actually use the

Home Mortgage

your mortgage as the date you take it out. How-

proceeds to buy, build, or substantially improve

ever, this applies only if you receive the loan

Interest Deduction

the home. This applies in the following situa-

proceeds within a reasonable time (such as

tions.

within 30 days) after your application is ap-

proved. If a timely application you make is re-

This part of the publication discusses the limits

1) You buy your home within 90 days before

jected, a reasonable additional time will be

on deductible home mortgage interest. These

or after the date you take out the mort-

allowed to make a new application.

limits apply to your home mortgage interest ex-

gage. The home acquisition debt is limited

pense if you have a home mortgage that does

to the home’s cost, plus the cost of any

not fit into any of the three categories listed at

substantial improvements within the limit

Cost of home or improvements. To deter-

the beginning of Part I under Fully deductible

described below in (2) or (3). (See Exam-

mine your cost, include amounts paid to acquire

interest.

ple 1.)

any interest in a qualified home or to substan-

Your home mortgage interest deduction is

tially improve the home.

2) You build or improve your home and take

limited to the interest on the part of your home

The cost of building or substantially improv-

out the mortgage before the work is com-

mortgage debt that is not more than your quali-

ing a qualified home includes the costs to ac-

pleted. The home acquisition debt is lim-

fied loan limit. This is the part of your home

quire real property and building materials, fees

ited to the amount of the expenses

mortgage debt that is grandfathered debt or that

for architects and design plans, and required

incurred within 24 months before the date

is not more than the limits for home acquisition

building permits.

of the mortgage.

debt and home equity debt. Table 1 can help you

figure your qualified loan limit and your deducti-

Substantial improvement. An improve-

3) You build or improve your home and take

ble home mortgage interest.

ment is substantial if it:

out the mortgage within 90 days after the

work is completed. The home acquisition

Home Acquisition Debt

1) Adds to the value of your home,

debt is limited to the amount of the ex-

penses incurred within the period begin-

2) Prolongs your home’s useful life, or

Home acquisition debt is a mortgage you took

ning 24 months before the work is

out after October 13, 1987, to buy, build, or

3) Adapts your home to new uses.

completed and ending on the date of the

substantially improve a qualified home (your

mortgage. (See Example 2.)

Repairs that maintain your home in good

main or second home). It also must be secured

condition, such as repainting your home, are not

by that home.

substantial improvements. However, if you paint

Example 1. You bought your main home on

If the amount of your mortgage is more than

your home as part of a renovation that substan-

June 3 for $175,000. You paid for the home with

the cost of the home plus the cost of any sub-

tially improves your qualified home, you can

cash you got from the sale of your old home. On

stantial improvements, only the debt that is not

include the painting costs in the cost of the

July 15, you took out a mortgage of $150,000

more than the cost of the home plus improve-

improvements.

secured by your main home. You used the

ments qualifies as home acquisition debt. The

$150,000 to invest in stocks. You can treat the

additional debt may qualify as home equity debt

Acquiring an interest in a home because of

mortgage as taken out to buy your home be-

(discussed later).

a divorce. If you incur debt to acquire the

cause you bought the home within 90 days

interest of a spouse or former spouse in a home,

before you took out the mortgage. The entire

because of a divorce or legal separation, you

Home acquisition debt limit. The total

mortgage qualifies as home acquisition debt be-

can treat that debt as home acquisition debt.

amount you can treat as home acquisition debt

cause it was not more than the home’s cost.

at any time on your main home and second

Part of home not a qualified home. To

home cannot be more than $1 million ($500,000

figure your home acquisition debt, you must

Example 2. On January 31, John began

if married filing separately). This limit is reduced

divide the cost of your home and improvements

building a home on the lot that he owned. He

(but not below zero) by the amount of your

between the part of your home that is a qualified

used $45,000 of his personal funds to build the

grandfathered debt (discussed later). Debt over

home and any part that is not a qualified home.

home. The home was completed on October 31.

this limit may qualify as home equity debt (also

See Divided use of your home under Qualified

On November 21, John took out a $36,000 mort-

discussed later).

Home in Part I.

gage that was secured by the home. The mort-

gage can be treated as used to build the home

Home Equity Debt

Refinanced home acquisition debt. Any se-

because it was taken out within 90 days after the

cured debt you use to refinance home acquisi-

home was completed. The entire mortgage

tion debt is treated as home acquisition debt.

qualifies as home acquisition debt because it

If you took out a loan for reasons other than to

However, the new debt will qualify as home

was not more than the expenses incurred within

buy, build, or substantially improve your home, it

acquisition debt only up to the amount of the

the period beginning 24 months before the

may qualify as home equity debt. In addition,

balance of the old mortgage principal just before

home was completed. This is illustrated by Fig-

debt you incurred to buy, build, or substantially

the refinancing. Any additional debt is not home

ure C.

improve your home, to the extent it is more than

Page 8

Publication 936 - Home Mortgage Interest Deduction - 2003 Page 8

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