• Acquisition Debt
• Equity Debt
• Debt Limits
• Form 1098 Modification
• Correspondence Audits
• Incorrect Interest Allocation
Many individuals who believe all of the interest reported by home mortgage lenders on the Form 1098 is automatically deductible may be in for a very unpleasant surprise when they file their 2016 tax returns. For many, all of the interest is not deductible, and Congress has mandated new reporting requirements for lenders that will help the IRS identify taxpayers who are deducting more than they are entitled to.
Deductible home mortgage interest is limited to interest on acquisition debt (up to $1 million of debt) and equity debt interest on up to $100,000 of equity debt secured by the taxpayer’s primary residence and a designated second residence. 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 (essentially cash equity taken for other purposes). In addition, equity debt interest is not deductible against the alternative minimum tax, which is frequently encountered by higher income taxpayers.
To catch taxpayers deducting more home mortgage interest than they are entitled to, the IRS will be requiring lenders to report on Form 1098 the:
• Date the loan was initiated – a factor 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.
• Balance of the mortgage on the first day of the tax year – also a factor in determining if the interest being deducted is in excess of the acquisition and equity debt limits.
• Address of the property securing the mortgage. This information will allow the IRS to determine if the taxpayer is including interest from more than the allowed primary and one secondary residence. This can also 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 which is not deductible against the AMT.
Taxpayers whose Form 1098 data indicates a potential for non-compliance can expect to be subjected to correspondence audits and to have the home mortgage interest included as part of an office audit.
Another mortgage interest issue is taxpayers who use home mortgages to finance rentals, businesses and other normally deductible uses but who may be allocating the interest between home mortgage interest and business or investment interest improperly, potentially resulting in an IRS adjustment.
If you have questions regarding your compliance with the home mortgage interest deduction requirements or feel you have not been in compliance in the past, please give this office a call (858)848-1040.