Publication 936 - Home Mortgage Interest Deduction - Department Of Treasury

Separate returns. If you are married filing

your home acquisition debt, which is limited to

you, the payment of interest may be alimony.

the cost of your home plus the cost of any

separately and you and your spouse own more

See the discussion of Payments for

improvements. (See

Home Acquisition Debt

than one home, you can each take into account

jointly-owned home under Alimony in Publica-

Part II.) Dividing the fair market value may affect

only one home as a qualified home. However, if

tion 504, Divorced or Separated Individuals.

your home equity debt limit, also explained in

you both consent in writing, then one spouse

Redeemable ground rents. In some states

Part II.

can take both the main home and a second

(such as Maryland), you can buy your home

home into account.

Renting out part of home. If you rent out

subject to a ground rent. A ground rent is an

part of a qualified home to another person (ten-

obligation you assume to pay a fixed amount per

Special Situations

ant), you can treat the rented part as being used

year on the property. Under this arrangement,

by you for residential living only if all of the

you are leasing (rather than buying) the land on

This section describes certain items that can be

following conditions apply.

which your home is located.

included as home mortgage interest and others

If you make annual or periodic rental pay-

•

The rented part of your home is used by

that cannot. It also describes certain special

ments on a redeemable ground rent, you can

the tenant primarily for residential living.

situations that may affect your deduction.

deduct them as mortgage interest.

•

The rented part of your home is not a

Late payment charge on mortgage payment.

A ground rent is a redeemable ground rent if

self-contained residential unit having sep-

You can deduct as home mortgage interest a

all of the following are true.

arate sleeping, cooking, and toilet facili-

late payment charge if it was not for a specific

•

Your lease, including renewal periods, is

ties.

service in connection with your mortgage loan.

for more than 15 years.

•

You do not rent (directly or by sublease)

Mortgage prepayment penalty. If you pay off

•

You can freely assign the lease.

the same or different parts of your home to

your home mortgage early, you may have to pay

•

more than two tenants at any time during

a penalty. You can deduct that penalty as home

You have a present or future right (under

the tax year. If two persons (and depen-

mortgage interest provided the penalty is not for

state or local law) to end the lease and

dents of either) share the same sleeping

a specific service performed or cost incurred in

buy the lessor’s entire interest in the land

quarters, they are treated as one tenant.

connection with your mortgage loan.

by paying a specific amount.

•

Sale of home. If you sell your home, you can

The lessor’s interest in the land is primarily

Office in home. If you have an office in your

deduct your home mortgage interest (subject to

a security interest to protect the rental

home that you use in your business, see Publi-

any limits that apply) paid up to, but not includ-

payments to which he or she is entitled.

cation 587, Business Use of Your Home. It ex-

ing, the date of the sale.

plains how to figure your deduction for the

Payments made to end the lease and to buy

business use of your home, which includes the

Example. John and Peggy Harris sold their

the lessor’s entire interest in the land are not

business part of your home mortgage interest.

home on May 7. Through April 30, they made

deductible as mortgage interest.

Home under construction. You can treat a

home mortgage interest payments of $1,220.

Nonredeemable ground rents. Payments

home under construction as a qualified home for

The settlement sheet for the sale of the home

on a nonredeemable ground rent are not mort-

a period of up to 24 months, but only if it be-

showed $50 interest for the 6-day period in May

gage interest. You can deduct them as rent if

comes your qualified home at the time it is ready

up to, but not including, the date of sale. Their

they are a business expense or if they are for

mortgage interest deduction is $1,270 ($1,220 +

for occupancy.

rental property.

The 24-month period can start any time on or

$50).

after the day construction begins.

Reverse Mortgages. A reverse mortgage is a

Prepaid interest. If you pay interest in ad-

loan where the lender pays you (in a lump sum,

Home destroyed. You may be able to con-

vance for a period that goes beyond the end of

a monthly advance, a line of credit, or a combi-

tinue treating your home as a qualified home

the tax year, you must spread this interest over

nation of all three) while you continue to live in

even after it is destroyed in a fire, storm, tor-

the tax years to which it applies. You can deduct

your home. With a reverse mortgage, you retain

nado, earthquake, or other casualty. This means

in each year only the interest that qualifies as

title to your home. Depending on the plan, your

you can continue to deduct the interest you pay

home mortgage interest for that year. However,

reverse mortgage becomes due with interest

on your home mortgage, subject to the limits

there is an exception that applies to points, dis-

when you move, sell your home, reach the end

described in this publication.

cussed later.

of a pre-selected loan period, or die. Because

You can continue treating a destroyed home

Mortgage interest credit. You may be able to

reverse mortgages are considered loan ad-

as a qualified home if, within a reasonable pe-

claim a mortgage interest credit if you were

vances and not income, the amount you receive

riod of time after the home is destroyed, you:

issued a mortgage credit certificate (MCC) by a

is not taxable. Any interest (including original

•

Rebuild the destroyed home and move

state or local government. Figure the credit on

issue discount) accrued on a reverse mortgage

into it, or

Form 8396, Mortgage Interest Credit. If you take

is not deductible until you actually pay it, which is

this credit, you must reduce your mortgage inter-

usually when you pay off the loan in full. Your

•

Sell the land on which the home was lo-

est deduction by the amount of the credit.

deduction may be limited because a reverse

cated.

See Form 8396 and Publication 530 for more

mortgage loan generally is subject to the limit on

information on the mortgage interest credit.

Home Equity Debt discussed in Part II.

This rule applies to your main home and to a

Ministers’ and military housing allowance.

second home that you treat as a qualified home.

Rental payments. If you live in a house before

If you are a minister or a member of the uni-

final settlement on the purchase, any payments

Time-sharing arrangements. You can treat a

formed services and receive a housing allow-

you make for that period are rent and not inter-

home you own under a time-sharing plan as a

ance that is not taxable, you can still deduct your

est. This is true even if the settlement papers call

qualified home if it meets all the requirements. A

home mortgage interest.

them interest. You cannot deduct these pay-

time-sharing plan is an arrangement between

ments as home mortgage interest.

Mortgage assistance payments. If you qual-

two or more people that limits each person’s

interest in the home or right to use it to a certain

ify for mortgage assistance payments for

Mortgage proceeds invested in tax-exempt

part of the year.

lower-income families under section 235 of the

securities. You cannot deduct the home mort-

National Housing Act, part or all of the interest

gage interest on grandfathered debt or home

Rental of time-share. If you rent out your

on your mortgage may be paid for you. You

equity debt if you used the proceeds of the

time-share, it qualifies as a second home only if

cannot deduct the interest that is paid for you.

mortgage to buy securities or certificates that

you also use it as a home during the year. See

produce tax-free income. “Grandfathered debt”

Second home rented out,

earlier, for the use

No other effect on taxes. Do not include

and “home equity debt” are defined in Part II of

these mortgage assistance payments in your

requirement. To know whether you meet that

this publication.

requirement, count your days of use and rental

income. Also, do not use these payments to

of the home only during the time you have a right

reduce other deductions, such as real estate

Refunds of interest. If you receive a refund of

taxes.

to use it or to receive any benefits from the rental

interest in the same year you paid it, you must

of it.

Divorced or separated individuals. If a di-

reduce your interest expense by the amount

Married taxpayers. If you are married and file

vorce or separation agreement requires you or

refunded to you. If you receive a refund of inter-

a joint return, your qualified home(s) can be

your spouse or former spouse to pay home

est you deducted in an earlier year, you gener-

owned either jointly or by only one spouse.

mortgage interest on a home owned by both of

ally must include the refund in income in the year

Publication 936 (2008)

Page 4

Publication 936 - Home Mortgage Interest Deduction - Department Of Treasury - 2008 Page 4

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