us internal revenue service: p936--1999

8/14/2019 US Internal Revenue Service: p936--1999

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ContentsIntroduction ........................................ 1

Part I. Home Mortgage Interest ........ 2Secured Debt .................................. 2Qualified Home ............................... 2Special Situations ........................... 4Points .............................................. 4Mortgage Interest Statement .......... 6How To Report ............................... 7

Special Rule for Tenant-Stockholders in CooperativeHousing Corporations .............. 7

Part II. Limits on Home MortgageInterest Deduction ....................... 7

Home Acquisition Debt ................... 7Home Equity Debt .......................... 8Grandfathered Debt ........................ 8Table 1 Instructions ........................ 9

How To Get More Information .......... 12

Index .................................................... 13

Important Changefor 1999Photographs of missing children. TheInternal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appearin this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

Important RemindersPersonal interest. Personal interest is notdeductible. Examples of personal interest in-clude interest on a loan to purchase an auto-mobile for personal use and credit card andinstallment interest incurred for personal ex-penses.

But you may be able to deduct interest youpay on a qualified education loan. For details,see Publication 970, Tax Benefits for HigherEducation.

Limit on itemized deductions. Certainitemized deductions (including home mort-gage interest) are limited if your adjustedgross income is more than $126,600 ($63,300

if you are married filing separately). For moreinformation, see the instructions for ScheduleA (Form 1040).

IntroductionThis publication discusses the rules for de-ducting home mortgage interest.

Part I contains general information onhome mortgage interest, including points. Italso explains how to report deductible intereston your tax return.

Part II explains how your deduction forhome mortgage interest may be limited. Itcontains Table 1, which is a worksheet you

Departmentof theTreasury

InternalRevenueService

Publica tion 936Cat. No. 10426G

HomeMortgageInterestDeduction

For use in preparing

1999 Returns


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may use to figure the limit on your deduction.

Useful ItemsYou may want to see:

Publication

527 Residential Rental Property

530 Tax Information for First-TimeHomeowners

535 Business Expenses

See How To Get More Information, nearthe end of this publication, for informationabout getting these publications.

Part I. HomeMortgage InterestThis part explains what you can deduct ashome mortgage interest. It includes dis-cussions on points and on how to reportdeductible interest on your tax return.

Generally, home mortgage interest is anyinterest you pay on a loan secured by yourhome (main home or a second home). Theloan may be a mortgage to buy your home,a second mortgage, a line of credit, or a homeequity loan.

You can deduct home mortgage interestonly if you meet all the following conditions.

You must file Form 1040 and itemizedeductions on Schedule A (Form 1040).

You must be legally liable for the loan.You cannot deduct payments you makefor someone else if you are not legallyliable to make them. Both you and thelender must intend that the loan be re-paid. In addition, there must be a truedebtor-creditor relationship between youand the lender.

The mortgage must be a secured debt

on a qualified home. Secured debt andqualified home are explained later.

Fully deductible interest. In most cases,you will be able to deduct all of your homemortgage interest. Whether it is all deductibledepends on the date you took out the mort-gage, the amount of the mortgage, and youruse of its proceeds.

If all of your mortgages fit into one or moreof the following three categories at all timesduring the year, you can deduct all of the in-terest on those mortgages. (If any one mort-gage fits into more than one category, add thedebt that fits in each category to your otherdebt in the same category.) If one or more ofyour mortgages does not fit into any of these

categories, use Part II of this publication tofigure the amount of interest you can deduct.The three categories are as follows.

1) Mortgages you took out on or beforeOctober 13, 1987 (called grandfathereddebt).

2) Mortgages you took out after October13, 1987, to buy, build, or improve yourhome (called home acquisition debt),but only if throughout 1999 these mort-gages plus any grandfathered debt to-taled $1 million or less ($500,000 or lessif married filing separately).

3) Mortgages you took out after October13, 1987, other than to buy, build, or

improve your home (called home equitydebt), but only if throughout 1999 thesemortgages totaled $100,000 or less($50,000 or less if married filing sepa-rately) andtotaled no more than the fairmarket value of your home reduced by(1) and (2).

The dollar limits for the second and third cat-egories apply to the combined mortgages onyour main home and second home.

See Part II for more detailed definitionsof grandfathered, home acquisition, and

home equity debt.You can use Figure A to check whether

your home mortgage interest is fully deduct-ible.

Secured DebtYou can deduct your home mortgage interestonly if your mortgage is a secured debt. Asecured debt is one in which you sign an in-strument (such as a mortgage, deed of trust,or land contract) that:

1) Makes your ownership in a qualifiedhome security for payment of the debt,

2) Provides, in case of default, that yourhome could satisfy the debt, and

3) Is recorded or is otherwise perfectedunder any state or local law that applies.

In other words, your mortgage is a se-cured debt if you put your home up as collat-eral to protect the interests of the lender. Ifyou cannot pay the debt, your home can thenserve as payment to the lender to satisfy(pay) the debt. In this publication, mortgagewill refer to secured debt.

Debt not secured by home. A debt is notsecured by your home if it is secured solelybecause of a lien on your general assets orif it is a security interest that attaches to theproperty without your consent (such as amechanic's lien or judgment lien).

A debt is not secured by your home if itonce was, but is no longer secured by yourhome.

Wraparound mortgage. This is not a se-cured debt unless it is recorded or otherwiseperfected under state law.

Example. Beth owns a home subject toa mortgage of $40,000. She sells the homefor $100,000 to John, who takes it subject tothe $40,000 mortgage. Beth continues tomake the payments on the $40,000 note.John pays $10,000 down and gives Beth a$90,000 note secured by a wraparoundmortgage on the home. Beth does not recordor otherwise perfect the $90,000 mortgageunder the state law that applies. Therefore,that mortgage is not a secured debt, and theinterest John pays on it is not deductible ashome mortgage interest.

Choice to treat the debt as not secured byyour home. You can choose to treat anydebt secured by your qualified home as notsecured by the home. This treatment beginswith the tax year for which you make thechoice and continues for all later tax years.You may revoke your choice only with theconsent of the Internal Revenue Service(IRS).

You may want to treat a debt as not se-cured by your home if the interest on that debtis fully deductible (for example, as a businessexpense) whether or not it qualifies as home

mortgage interest. This may allow you, if thelimits in Part II apply to you, more of a de-duction for interest on other debts that aredeductible only as home mortgage interest.

Cooperative apartment owner. If you ownstock in a cooperative housing corporation,see the Special Rule for Tenant-Stockholdersin Cooperative Housing Corporations, later.

Qualified HomeFor you to take a home mortgage interestdeduction, your debt must be secured by aqualified home. This means your main homeor your second home. A home includes ahouse, condominium, cooperative, mobilehome, house trailer, boat, or similar propertythat has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on ahome other than your main or second homemay be deductible if the proceeds of the loanwere used for business, investment, or otherdeductible purposes. Otherwise, it is consid-ered personal interest and is not deductible.

Main home. You can have only one mainhome at any one time. Generally, this is thehome where you spend most of your time.

Second home. A second home is a homethat you choose to treat as your secondhome.

Second home not rented out. If youhave a second home that you do not hold outfor rent or resale to others at any time duringthe year, you can treat it as a qualified home.You do not have to use the home during theyear.

Second home rented out. If you have asecond home and rent it out part of the year,you also must use it as a home during theyear for it to be a qualified home. You mustuse this home more than 14 days or morethan 10% of the number of days during theyear that the home is rented at a fair rental,whichever is longer. If you do not use the

home long enough, it is considered rentalproperty and not a second home. For infor-mation on residential rental property, seePublication 527.

More than one second home. If youhave more than one second home, you cantreat only one as the qualified second homeduring any year. However, you can changethe home you treat as a second home in thefollowing three situations.

1) If you get a new home during the year,you can choose to treat the new homeas your second home as of the day youbuy it.

2) If your main home no longer qualifies asyour main home, you can choose to treat

it as your second home as of the day youstop using it as your main home.

3) If your second home is sold during theyear or becomes your main home, youcan choose a new second home as ofthe day you sell the old one or beginusing it as your main home.

Divided use of your home. The only partof your home that is considered a qualifiedhome is the part you use for residential living.If you use part of your home for other thanresidential living, such as a home office, youmust allocate the use of your home. You mustthen divide both the cost and fair market valueof your home between the part that is a

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Figure A.

Is My Home Mortgage Interest Fully Deductible?

Start Here:

No

Yes

If all mortgages on your main or second home exceed the homes fair market value, a lower limit may apply. See Home equity debt limitunder Home EquityDebt in Part II.

(Instructions: Include balances ofALL mortgages secured by your main home and second home. Answer YESonly if the answer is true at ALLtimes during the year.)

Were your total mortgage balances $100,000 orless

1($50,000 or less if married filing separately)?

Were all of your home mortgages taken out on orbefore 10-13-87?

Were all of your home mortgages taken out after10-13-87 used to buy, build, or improve the main

home secured by that main home mortgage orusedto buy, build, or improve the second home securedby that second home mortgage, orboth?

Were the mortgage balances $1,000,000 or less($500,000 or less if married filing separately)?

Your home mortgage interest is fully deductible. Youdo not need to read Part IIof this publication.

Go to Part IIof this publication to determine yourdeductible interest.

Were your grandfathered debt plus home acquisition

debt balances $1,000,000 or less2

($500,000 or lessif married filing separately)?

Were your home equity debt balances $100,000 orless

1($50,000 or less if married filing separately)?

Yes

No

Yes

No

No

Yes

No

No

Yes

Amounts over the $1,000,000 limit ($500,000 if married filing separately) qualify as home equity debt if they are not more than the total home equity debt limit.See Part IIof this publication for more information about grandfathered debt, home acquisition debt, and home equity debt.

1

2

Yes

qualified home and the part that is not. Di-viding the cost may affect the amount of yourhome acquisition debt, which is limited to thecost of your home plus the cost of any im-provements. (See Home Acquisition Debt inPart II.) Dividing the fair market value mayaffect your home equity debt limit, also ex-plained in Part II.

Renting out part of home. If you rentout part of a qualified home to another person(tenant), you can treat the rented part as be-ing used by you for residential living only ifall three of the following conditions apply.

1) The rented part of your home is used bythe tenant primarily for residential living.

2) The rented part of your home is not aself-contained residential unit havingseparate sleeping, cooking, and toiletfacilities.

3) You do not rent (directly or by sublease)the same or different parts of your hometo more than two tenants at any time

during the tax year. If two persons (anddependents of either) share the samesleeping quarters, they are treated asone tenant.

Office in home. If you have an office inyour home that you use in your business, seePublication 587, Business Use of YourHome. It explains how to figure your de-

duction for the business use of your home,which includes the business part of yourhome mortgage interest.

Home under construction. You can treat ahome under construction as a qualified homefor a period of up to 24 months, but only if itbecomes your qualified home at the time it isready for occupancy.

The 24-month period can start any timeon or after the day construction begins.

Home destroyed. You may be able to con-tinue treating your home as a qualified homeeven after it is destroyed in a fire, storm,tornado, earthquake, or other casualty. This

means you can continue to deduct the inter-est you pay on your home mortgage, subjectto the limits described in this publication.

You can continue treating a destroyedhome as a qualified home if, within a rea-sonable period of time after the home is de-stroyed, you:

1) Rebuild the destroyed home and moveinto it, or

2) Sell the land on which the home was lo-cated.

This rule applies to your main home andto a second home that you treat as a qualifiedhome. Also, it applies whether or not yourhome is in a federal disaster area.

Time-sharing arrangements. You can treata home you own under a time-sharing planas a qualified home if it meets all the re-quirements. A time-sharing plan is an ar-rangement between two or more people thatlimits each person's interest in the home orright to use it to a certain part of the year.

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Rental of time share. If you rent out yourtime-share, it qualifies as a second home onlyif you also use it as a home. See Secondhome rented out, earlier, for the use require-ment. To know whether you meet that re-quirement, count your days of use and rentalof the home only during the time you have aright to use it or to receive any benefits fromthe rental of it.

Married taxpayers. If you are married andfile a joint return, your qualified home(s) canbe owned either jointly or by only one spouse.

Separate returns. If you are married fil-ing separately and you and your spouse ownmore than one home, you can each take intoaccount only one home as a qualified home.However, if you both consent in writing, thenone spouse can take both the main home anda second home into account.

Special SituationsThis section describes certain items that canbe included as home mortgage interest andothers that cannot. It also describes certainspecial situations that may affect your de-duction.

Late payment charge on mortgage pay-

ment. You can deduct as home mortgageinterest a late payment charge if it was not fora specific service in connection with yourmortgage loan.

Mortgage prepayment penalty. If you payoff your home mortgage early, you may haveto pay a penalty. You can deduct that penaltyas home mortgage interest provided thepenalty is not for a specific service performedor cost incurred in connection with yourmortgage loan.

Sale of home. If you sell your home, you candeduct your home mortgage interest (subjectto any limits that apply) paid up to, but notincluding, the date of the sale.

Example. John and Peggy Harris soldtheir home on May 7. Through April 30, theymade home mortgage interest payments of$1,220. The settlement sheet for the sale ofthe home showed $50 interest for the 6-dayperiod in May up to, but not including, thedate of sale. Their mortgage interest de-duction is $1,270 ($1,220 + $50).

Prepaid interest. If you pay interest in ad-vance for a period that goes beyond the endof the tax year, you must spread this interestover the tax years to which it applies. You candeduct in each year only the interest thatqualifies as home mortgage interest for thatyear. However, there is an exception. See thediscussion on Points, later.

Mortgage interest credit. You may be ableto claim a mortgage interest credit if you wereissued a mortgage credit certificate (MCC) bya state or local government. Figure the crediton Form 8396, Mortgage Interest Credit. Ifyou take this credit, you must reduce yourmortgage interest deduction by the amountof the credit.

See Form 8396 and Publication 530 formore information on the mortgage interestcredit.

Ministers' and military housing allowance.If you are a minister or a member of the uni-formed services and receive a housing al-

lowance that is not taxable, you can still de-duct your home mortgage interest.

Mortgage assistance payments. If youqualify for mortgage assistance paymentsunder section 235 of the National HousingAct, part or all of the interest on your mort-gage may be paid for you. You cannot deductthe interest that is paid for you.

No other effect on taxes. Do not includethese mortgage assistance payments in yourincome. Also, do not use these payments toreduce other deductions, such as real estatetaxes.

Divorced or separated individuals. If a di-vorce or separation agreement requires youor your spouse or former spouse to pay homemortgage interest on a home owned by bothof you, the payment of interest may bealimony. See the discussion of Payments for jointly-owned homeunder Alimony in Publi-cation 504, Divorced or Separated Individuals.

Redeemable ground rents. In some states(such as Maryland), you may buy your homesubject to a ground rent. A ground rent is anobligation you assume to pay a fixed amountper year on the property. Under this ar-

rangement, you are leasing (rather than buy-ing) the land on which your home is located.

If you make annual or periodic rentalpayments on a redeemable ground rent, youcan deduct them as mortgage interest.

A ground rent is a redeemable ground rentif all of the following are true.

1) Your lease, including renewal periods, isfor more than 15 years.

2) You can freely assign the lease.

3) You have a present or future right (understate or local law) to end the lease andbuy the lessor's entire interest in the landby paying a specific amount.

4) The lessor's interest in the land is pri-

marily a security interest to protect therental payments to which he or she isentitled.

Payments made to end the lease and tobuy the lessor's entire interest in the land arenot ground rents. You cannot deduct them.

Nonredeemable ground rent. Paymentson a nonredeemable ground rent are notmortgage interest. You can deduct them asrent if they are a business expense or if theyare for rental property.

Rental payments. If you live in a house be-fore final settlement on the purchase, anypayments you make for that period are rentand not interest. This is true even if thesettlement papers call them interest. Youcannot deduct these payments as homemortgage interest.

Mortgage proceeds invested in tax-exemptsecurities. You cannot deduct the homemortgage interest on grandfathered debt orhome equity debt if you used the proceedsof the mortgage to buy securities or certif-icates that produce tax-free income. Grand-fathered debt and home equity debt are de-fined in Part IIof this publication.

Refunds of interest. If you receive a refundof interest in the same year you paid it, youmust reduce your interest expense by theamount refunded to you. If you receive a re-

fund of interest you deducted in an earlieryear, you generally must include the refundin income in the year you receive it. However,you need to include it only up to the amountof the deduction that reduced your tax in theearlier year. This is true whether the interestovercharge was refunded to you or was usedto reduce the outstanding principal on yourmortgage.

If you received a refund of interest youoverpaid in an earlier year, you generally willreceive a Form 1098, Mortgage InterestStatement, showing the refund in box 3. Forinformation about Form 1098, see MortgageInterest Statement, later.

For more information on how to treat re-funds of interest deducted in earlier years,see Recoveries in Publication 525, Taxableand Nontaxable Income.

Cooperative apartment owner. If youown a cooperative apartment, you must re-duce your home mortgage interest deductionby your share of any cash portion of a pa-tronage dividend that the cooperative re-ceives. The patronage dividend is a partialrefund to the cooperative housing corporationof mortgage interest it paid in a prior year.

If you receive a Form 1098 from the co-operative housing corporation, the formshould show only the amount you can deduct.

PointsThe term points is used to describe certaincharges paid, or treated as paid, by a bor-rower to obtain a home mortgage. Pointsmay also be called loan origination fees,maximum loan charges, loan discount, ordiscount points.

A borrower is treated as paying any pointsthat a home seller pays for the borrower'smortgage. See Points paid by the seller, later.

General rule. You generally cannot deductthe full amount of points in the year paid.Because they are prepaid interest, you gen-erally must deduct them over the life (term)

of the mortgage.Exception. You can fully deduct pointsin the year paid if you meet all the followingtests.

1) Your loan is secured by your main home.(Your main home is the one you live inmost of the time.)

2) Paying points is an established businesspractice in the area where the loan wasmade.

3) The points paid were not more than thepoints generally charged in that area.

4) You use the cash method of accounting.This means you report income in theyear you receive it and deduct expensesin the year you pay them. Most individ-uals use this method.

5) The points were not paid in place ofamounts that ordinarily are stated sepa-rately on the settlement statement, suchas appraisal fees, inspection fees, titlefees, attorney fees, and property taxes.

6) You use your loan to buy or build yourmain home.

7) The points were computed as a per-centage of the principal amount of themortgage.

8) The amount is clearly shown on thesettlement statement (such as the Uni-form Settlement Statement, Form

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Figure B.

Are My Points Fully Deductible This Year?

Start Here:

No

Yes

Is the loan secured by your main home?

Is the payment of points an established

business practice in your area?

Were the points paid more than theamount generally charged in your area?

Do you use the cash method ofaccounting?

Did you take out the loan to improve yourmain home?

Did you take out the loan to buy or buildyour main home?

Were the points computed as apercentage of the principal amount of themortgage?

Were the funds you provided (other thanthose you borrowed from your lender ormortgage broker), plus any points theseller paid, at least as much as the pointscharged?*

Is the amount paid clearly shown aspoints on the settlement statement?

You can fully deduct the points this yearon Schedule A (Form 1040).

You cannot fully deduct the points thisyear. See the discussion on Points.

* The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other fundsyou paid at or before closing for any purpose.

Yes

No

No

Yes

No

Yes

No

No

Yes

No

Yes

Yes

No

No

Yes

Yes

Were the points paid in place of amounts

that ordinarily are separately stated on thesettlement sheet?

Yes

No

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HUD-1) as points charged for the mort-gage. The points may be shown as paidfrom either your funds or the seller's.

9) The funds you provided at or beforeclosing, plus any points the seller paid,were at least as much as the pointscharged. The funds you provided do nothave to have been applied to the points.They can include a down payment, anescrow deposit, earnest money, andother funds you paid at or before closingfor any purpose. You cannot have bor-

rowed these funds from your lender ormortgage broker.

Home improvement loan. You can alsofully deduct in the year paid points paid on aloan to improve your main home, if state-ments (1) through (5) above are true.

Figure B. You can use Figure Bas a quickguide to see whether your points are fullydeductible in the year paid. If you do notqualify under the exception to deduct the fullamount of points in the year paid, see Pointsin chapter 8 of Publication 535 for the ruleson when and how much you can deduct.However, if the points relate to refinancing ahome mortgage, see Refinancing, later.

Amounts charged for services. Amountscharged by the lender for specific servicesconnected to the loan are not interest. Ex-amples of these charges are:

1) Appraisal fees,

2) Notary fees,

3) Preparation costs for the mortgage noteor deed of trust,

4) Mortgage insurance premiums, and

5) VA funding fees.

You cannot deduct these amounts as pointseither in the year paid or over the life of the

mortgage. For information about the taxtreatment of these amounts and other settle-ment fees and closing costs, get Publication530.

Points paid by the seller. The termpoints includes loan placement fees that theseller pays to the lender to arrange financingfor the buyer.

Treatment by seller. The seller cannotdeduct these fees as interest. But they are aselling expense that reduces the amount re-alized by the seller. See Publication 523,Selling Your Home, for information on sellingyour home.

Treatment by buyer. The buyer reducesthe basis of the home by the amount of theseller-paid points and treats the points as ifhe or she had paid them. If all the tests underthe Exception, earlier, are met, the buyer candeduct the points in the year paid. If any ofthose tests is not met, the buyer deducts thepoints over the life of the loan.

If you need information about the basis ofyour home, see Publication 523 or Publication530.

Funds provided are less than points. If youmeet all the tests in the Exception, earlier,except that the funds you provided were lessthan the points charged to you (test 9), youcan deduct the points in the year paid, up tothe amount of funds you provided. In addition,you can deduct any points paid by the seller.

Example 1. When you took out a$100,000 mortgage loan to buy your home inDecember, you were charged one point($1,000). You meet all the nine tests for de-ducting points in the year paid, except theonly funds you provided were a $750 downpayment. Of the $1,000 charged for points,you can deduct $750 in the year paid. Youspread the remaining $250 over the life of themortgage.

Example 2. The facts are the same as inExample 1, except that the person who sold

you your home also paid one point ($1,000)to help you get your mortgage. In the yearpaid, you can deduct $1,750 ($750 of theamount you were charged plus the $1,000paid by the seller). You must reduce the basisof your home by the $1,000 paid by the seller.

Excess points. If you meet all the tests inthe Exception, earlier, except that the pointspaid were more than generally paid in yourarea (test 3), you deduct in the year paid onlythe points that are generally charged. Youmust spread any additional points over the lifeof the mortgage.

CAUTION

!Second home. TheException, ear-lier, does not apply to points you pay

on loans secured by your secondhome. You can deduct these points only overthe life of the loan.

Mortgage ending early. If you spread yourdeduction for points over the life of the mort-gage, you can deduct any remaining balancein the year the mortgage ends. However, ifyou refinance the mortgage with the samelender, you cannot deduct any remainingbalance of spread points. Instead, deduct theremaining balance over the term of the newloan.

A mortgage may end early due to a pre-payment, refinancing, foreclosure, or similar

event.

Example. Dan paid $3,000 in points in1993 that he had to spread out over the15-year life of the mortgage. He had deducted$1,200 of these points through 1998.

Dan prepaid his mortgage in full in 1999.He can deduct the remaining $1,800 of pointsin 1999.

Refinancing. Generally, points you pay torefinance a mortgage are not deductible in fullin the year you pay them. This is true even ifthe new mortgage is secured by your mainhome.

However, if you use part of the refinancedmortgage proceeds to improve your main

homeand you meet the first five tests listedunder the Exception, earlier, you can fullydeduct the part of the points related to theimprovement in the year paid. You can de-duct the rest of the points over the life of theloan.

Example 1. In 1991, Bill Fields got amortgage to buy a home. The interest rateon that mortgage loan was 11%. In 1999, Billrefinanced that mortgage with a 15-year$100,000 mortgage loan that has an interestrate of 7%. The mortgage is secured by hishome. To get the new loan, he had to paythree points ($3,000). Two points ($2,000)were for prepaid interest, and one point($1,000) was charged for services, in place

of amounts that ordinarily are stated sepa-rately on the settlement statement. Bill paidthe points out of his private funds, rather thanout of the proceeds of the new loan. Thepayment of points is an established practicein the area, and the points charged are notmore than the amount generally chargedthere. Bill's first payment on the new loan wasdue July 1. He made six payments on theloan in 1999 and is a cash basis taxpayer.

Bill used the funds from the new mortgageto repay his existing mortgage. Although thenew mortgage loan was for Bill's continuedownership of his main home, it was not for thepurchase or improvement of that home. Forthat reason, Bill does not meet all the tests inthe Exception, and he cannot deduct all of thepoints in 1999. He can deduct two points($2,000) ratably over the life of the loan. Hededucts $67 [($2,000 180 months) 6payments] of the points in 1999. The otherpoint ($1,000) was a fee for services and isnot deductible.

Example 2. The facts are the same as inExample 1, except that Bill used $25,000 ofthe loan proceeds to improve his homeand$75,000 to repay his existing mortgage. Billdeducts 25% ($25,000 $100,000) of the$2,000 prepaid interest in 1999. His deduction

is $500 ($2,000 25%).Bill also deducts the ratable part of the

remaining $1,500 ($2,000 $500) prepaidinterest that must be spread over the life ofthe loan. This is $50 [($1,500 180 months) 6 payments] in 1999. The total amount Billdeducts in 1999 is $550 ($500 + $50).

Limits on deduction. You cannot fully de-duct points paid on a mortgage that exceedsthe limits discussed in Part II. See the Table1 Instructionsfor line 10.

Form 1098. The mortgage interest statementyou receive should show not only the totalinterest paid during the year, but also yourdeductible points. See Mortgage InterestStatement, next.

Mortgage Interest StatementIf you paid $600 or more of mortgage interest(including certain points) during the year onany one mortgage, you generally will receivea Form 1098, Mortgage Interest Statement,or a similar statement from the mortgageholder. You will receive the statement if youpay interest to a person (including a financialinstitution or cooperative housing corporation)in the course of that person's trade or busi-ness. A governmental unit is a person forpurposes of furnishing the statement.

You should receive the statement for eachyear by January 31 of the following year. Acopy of this form will also be sent to the IRS.

The statement will show the total interestyou paid during the year. If you purchased amain home during the year, it also will showthe deductible points paid during the year,including seller-paid points. However, itshould not show any interest that was paid foryou by a government agency.

As a general rule, Form 1098 will includeonly points that you can fully deduct in theyear paid. However, certain points not in-cluded on Form 1098 also may be deductible,either in the year paid or over the life of theloan. See the earlier discussion of Points todetermine whether you can deduct points notshown on Form 1098.

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Prepaid interest on Form 1098. If you pre-paid interest in 1999 that accrued in full byJanuary 15, 2000, this prepaid interest maybe included in box 1 of Form 1098. However,you cannot deduct the prepaid amount forJanuary 2000 in 1999. (See Prepaid interest,earlier.) You will have to figure the interestthat accrued for 2000 and subtract it from theamount in box 1. You will include the interestfor January 2000 with other interest you payfor 2000.

Refunded interest. If you received a refundof mortgage interest you overpaid in an earlieryear, you generally will receive a Form 1098showing the refund in box 3. See Refunds ofinterest, earlier.

How To ReportDeduct the home mortgage interest andpoints reported to you on Form 1098 on line10, Schedule A (Form 1040). If you paid moredeductible interest to the financial institutionthan the amount shown on Form 1098, showthe larger deductible amount on line 10. At-tach a statement explaining the differenceand write See attached next to line 10.

Deduct home mortgage interest that was

notreported to you on Form 1098 on line 11of Schedule A (Form 1040). If you paid homemortgage interest to the person from whomyou bought your home, show that person'sname, address, and social security number(SSN) or employer identification number(EIN) on the dotted lines next to line 11. Theseller must give you this number and youmust give the seller your SSN. A Form W9can be used for this purpose. Failure to meetany of these requirements may result in a $50penalty for each failure.

If you can take a deduction for points thatwere notreported to you on Form 1098, de-duct those points on line 12 of Schedule A(Form 1040).

More than one borrower. If you and at leastone other person (other than your spouse ifyou file a joint return) were liable for and paidinterest on a mortgage that was for yourhome, and the other person received a Form1098 showing the interest that was paid dur-ing the year, attach a statement to your returnexplaining this. Show how much of the inter-est each of you paid, and give the name andaddress of the person who received the form.Deduct your share of the interest on line 11of Schedule A (Form 1040), and write Seeattached next to the line.

Similarly, if you are the payer of record ona mortgage on which there are other borrow-ers entitled to a deduction for the interestshown on the Form 1098 you received, de-duct only your share of the interest on line 10

of Schedule A (Form 1040). You should leteach of the other borrowers know what hisor her share is.

Mortgage proceeds used for business orinvestment. If your home mortgage interestdeduction is limited under the rules explainedin Part II, but all or part of the mortgage pro-ceeds were used for business, investment,or other deductible activities, see Table 2. Itshows where to deduct the part of your ex-cess interest that is for those activities. TheTable 1 Instructions for line 13 in Part IIex-plain how to divide the excess interest amongthe activities for which the mortgage proceedswere used.

Special Rule forTenant-Stockholders inCooperative HousingCorporationsA qualified home includes stock in a cooper-ative housing corporation owned by atenant-stockholder. This applies only if thetenant-stockholder is entitled to live in thehouse or apartment because of owning stockin the cooperative.

Cooperative housing corporation. This isa corporation that meets all of the followingconditions.

1) The corporation has only one class ofstock outstanding.

2) Each of the stockholders, only becauseof owning the stock, can live in a house,apartment, or house trailer owned orleased by the corporation.

3) No stockholder can receive any distribu-tion out of capital, except on a partial orcomplete liquidation of the corporation.

4) The tenant-stockholders must pay atleast 80% of the corporation's gross in-

come for the tax year. For this purpose,gross income means all income receivedduring the entire tax year, including anyreceived before the corporation changedto cooperative ownership.

Stock used to secure debt. In some cases,you cannot use your cooperative housingstock to secure a debt because of either:

1) Restrictions under local or state law, or

2) Restrictions in the cooperative agree-ment (other than restrictions in which themain purpose is to permit the tenant-stockholder to treat unsecured debt assecured debt).

However, you can treat a debt as secured bythe stock to the extent that the proceeds areused to buy the stock under the allocation ofinterest rules. See chapter 8 of Publication535 for details on these rules.

Figuring deductible home mortgage inter-est. Generally, if you are a tenant-stockholder, you can deduct payments youmake for your share of the interest paid orincurred by the cooperative. The interest mustbe on a debt to buy, build, change, improve,or maintain the cooperative's housing, or ona debt to buy the land.

Figure your share of this interest bymultiplying the total by the following fraction.

Your shares of stock in thecooperative

The total shares of stock in thecooperative

Limits on deduction. To figure how thelimits discussed in Part IIapply to you, treatyour share of the cooperative's debt as debtincurred by you. The cooperative should de-termine your share of its grandfathered debt,its home acquisition debt, and its home equitydebt. (Your share of each of these types ofdebt is equal to the average balance of eachdebt multiplied by the fraction just given.) Af-ter your share of the average balance of eachtype of debt is determined, you include it withthe average balance of that type of debt se-cured by your stock.

Form 1098. The cooperative should giveyou a Form 1098 showing your share of theinterest. Use the rules in this publication todetermine your deductible mortgage interest.

Part II. Limits onHome MortgageInterest DeductionThis part of the publication discusses thelimits on deductible home mortgage interest.These limits apply to your home mortgageinterest expense if you have a home mort-gage that does not fit into any of the threecategories listed at the beginning of Part Iunder Fully deductible interest.

Your home mortgage interest deduction islimited to the interest on the part of your homemortgage debt that is not more than yourqualified loan limit. This is the part of yourhome mortgage debt that is grandfathereddebt or that is not more than the limits forhome acquisition debt and home equity debt.Table 1 can help you figure your qualified loanlimit and your deductible home mortgage in-terest.

Home Acquisition DebtHome acquisition debt is a mortgage you tookout after October 13, 1987, to buy, build, orsubstantially improve a qualified home (yourmain or second home). It also must be se-cured by that home.

If the amount of your mortgage is morethan the cost of the home plus the cost of anysubstantial improvements, only the debt thatis not more than the cost of the home plusimprovements qualifies as home acquisitiondebt. The additional debt may qualify ashome equity debt (discussed later).

Home acquisition debt limit. The total

amount you can treat as home acquisitiondebt at any time on your main home andsecond home cannot be more than $1 million($500,000 if married filing separately). Thislimit is reduced (but not below zero) by theamount of your grandfathered debt (dis-cussed later). Debt over this limit may qualifyas home equity debt (also discussed later).

Refinanced home acquisition debt. Anysecured debt you use to refinance home ac-quisition debt is treated as home acquisitiondebt. However, the new debt will qualify ashome acquisition debt only up to the amountof the balance of the old mortgage principal

just before the refinancing. Any additionaldebt is not home acquisition debt, but may

qualify as home equity debt (discussed later).

Mortgage that qualifies later. A mortgagethat does not qualify as home acquisition debtbecause it does not meet all the requirementsmay qualify at a later time. For example, adebt that you use to buy your home may notqualify as home acquisition debt because itis not secured by the home. However, if thedebt is later secured by the home, it mayqualify as home acquisition debt after thattime. Similarly, a debt that you use to buyproperty may not qualify because the propertyis not a qualified home. However, if theproperty later becomes a qualified home, thedebt may qualify after that time.

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Mortgage treated as used to buy, build, orimprove home. A mortgage secured by aqualified home may be treated as home ac-quisition debt, even if you do not actually usethe proceeds to buy, build, or substantiallyimprove the home. This applies in the fol-lowing situations.

1) You buy your home within 90 days be-fore or after the date you take out themortgage. The home acquisition debt islimited to the home's cost, plus the costof any substantial improvements within

the limit described below in (2) or (3).(See Example 1.)

2) You build or improve your home andtake out the mortgage before the workis completed. The home acquisition debtis limited to the amount of the expensesincurred within 24 months before thedate of the mortgage.

3) You build or improve your home andtake out the mortgage within 90 daysafter the work is completed. The homeacquisition debt is limited to the amountof the expenses incurred within the pe-riod beginning 24 months before thework is completed and ending on thedate of the mortgage. (See Example 2.)

Example 1. You bought your main homeon June 3 for $175,000. You paid for thehome with cash you got from the sale of yourold home. On July 15, you took out a mort-gage of $150,000 secured by your mainhome. You used the $150,000 to invest instocks. You can treat the mortgage as takenout to buy your home because you bought thehome within 90 days before you took out themortgage. The entire mortgage qualifies ashome acquisition debt because it was notmore than the home's cost.

Example 2. On January 31, John beganbuilding a home on the lot that he owned. Heused $45,000 of his personal funds to buildthe home. The home was completed on Oc-

tober 31. On November 21, John took out a$36,000 mortgage that was secured by thehome. The mortgage can be treated as usedto build the home because it was taken outwithin 90 days after the home was completed.The entire mortgage qualifies as home ac-quisition debt because it was not more thanthe expenses incurred within the period be-ginning 24 months before the home wascompleted. This is illustrated by Figure C.

Figure C.

JohnStarts

BuildingHome

HomeCompleted($45,000 inPersonal

Funds Used)

$36,000MortgageTaken Out

Jan. 31 Oct. 31 Nov. 21

9 Months(Within 24 Months)

22 Days(Within 90 Days)

Date of the mortgage. The date you takeout your mortgage is the day you receive theloan proceeds. This is generally the closingdate. You can treat the day you apply inwriting for your mortgage as the date you take

it out. However, this applies only if you re-ceive the loan proceeds within a reasonabletime (such as within 30 days) after your ap-plication is approved. If a timely applicationyou make is rejected, a reasonable additionaltime will be allowed to make a new applica-tion.

Cost of home or improvements. To deter-mine your cost, include amounts paid to ac-quire any interest in a qualified home or tosubstantially improve the home.

The cost of building or substantially im-proving a qualified home includes the coststo acquire real property and building materi-als, fees for architects and design plans, andrequired building permits.

Substantial improvement. An improve-ment is substantial if it:

1) Adds to the value of your home,

2) Prolongs your home's useful life, or

3) Adapts your home to new uses.

Repairs that maintain your home in goodcondition, such as repainting your home, arenot substantial improvements. However, ifyou paint your home as part of a renovationthat substantially improves your qualified

home, you can include the painting costs inthe cost of the improvements.Acquiring an interest in a home be-

cause of a divorce. If you incur debt to ac-quire the interest of a spouse or formerspouse in a home, because of a divorce orlegal separation, you can treat that debt ashome acquisition debt.

Part of home not a qualified home. Tofigure your home acquisition debt, you mustdivide the cost of your home and improve-ments between the part of your home that isa qualified home and any part that is not aqualified home. See Divided use of yourhomeunder Qualified Homein Part I.

Home Equity DebtIf you took out a loan for reasons other thanto buy, build, or substantially improve yourhome, it may qualify as home equity debt. Inaddition, debt you incurred to buy, build, orsubstantially improve your home, to the extentit is more than the home acquisition debt limit,may qualify as home equity debt.

Home equity debt is a mortgage you tookout after October 13, 1987, that:

1) Does not qualify as home acquisitiondebt or as grandfathered debt, and

2) Is secured by your qualified home.

Example. You bought your home for cash10 years ago. You did not have a mortgageon your home until last year, when you took

out a $20,000 loan, secured by your home,to pay for your daughter's college tuition andyour father's medical bills. This loan is homeequity debt.

Home equity debt limit. There is a limit onthe amount of debt that can be treated ashome equity debt. The total home equity debton your main home and second home is lim-ited to the smallerof:

1) $100,000 ($50,000 if married filing sep-arately), or

2) The total of each home's fair marketvalue (FMV) reduced (but not belowzero) by the amount of its home acqui-

sition debt and grandfathered debt. De-termine the FMV and the outstandinghome acquisition and grandfathereddebt for each home on the date that thelast debt was secured by the home.

Example. You own one home that youbought in 1990. Its FMV now is $110,000, andthe current balance on your original mortgage(home acquisition debt) is $95,000. Bank Moffers you a home mortgage loan of 125% ofthe FMV of the home less any outstandingmortgages or other liens. To consolidate

some of your other debts, you take out a$42,500 home mortgage loan [(125% $110,000) $95,000] with Bank M.

Your home equity debt is limited to$15,000. This is the smaller of:

1) $100,000, the maximum limit, or

2) $15,000, the amount that the FMV of$110,000 exceeds the amount of homeacquisition debt of $95,000.

Debt higher than limit. Interest onamounts over the home equity debt limit(such as the interest on $27,500 [$42,500 $15,000] in the preceding example) generallyis treated as personal interest and is notdeductible. But if the proceeds of the loan

were used for investment, business, or otherdeductible purposes, the interest may bedeductible. If it is, see Line 13under the Table1 Instructions for an explanation of how toallocate the excess interest and see Table 2.

Part of home not a qualified home. Tofigure the limit on your home equity debt, youmust divide the FMV of your home betweenthe part that is a qualified home and any partthat is not a qualified home. See Divided useof your home under Qualified Home in PartI.

Fair market value (FMV). This is theprice at which the home would change handsbetween you and a buyer, neither having tosell or buy, and both having reasonableknowledge of all relevant facts. Sales of sim-

ilar homes in your area, on about the samedate your last debt was secured by the home,may be helpful in figuring the FMV.

Grandfathered DebtIf you took out a mortgage on your home be-fore October 14, 1987, or you refinanced sucha mortgage, it may qualify as grandfathereddebt. To qualify, it must have been securedby your qualified home on October 13, 1987,and at all times after that date. How you usedthe proceeds does not matter.

Grandfathered debt is not limited. All ofthe interest you paid on grandfathered debtis fully deductible home mortgage interest.However, the amount of your grandfathereddebt reduces the $1 million limit for homeacquisition debt and the limit based on yourhome's fair market value for home equitydebt.

Refinanced grandfathered debt. If you re-financed grandfathered debt after October 13,1987, for an amount that was not more thanthe mortgage principal left on the debt, thenyou still treat it as grandfathered debt. To theextent the new debt is more than that mort-gage principal, it is treated as home acquisi-tion or home equity debt, and the mortgageis a mixed-use mortgage (discussed laterunder Average Mortgage Balance in the Ta-ble 1 Instructions). The debt must be securedby the qualified home.

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You treat grandfathered debt that was re-financed after October 13, 1987, as grandfa-thered debt only for the term left on the debtthat was refinanced. After that, you treat it ashome acquisition debt or home equity debt,depending on how you used the proceeds.

Exception. If the debt before refinancingwas like a balloon note (the principal on thedebt was not amortized over the term of thedebt), then you treat the refinanced debt asgrandfathered debt for the term of the firstrefinancing. This term cannot be more than30 years.

Example. Chester took out a $200,000first mortgage on his home in 1985. Themortgage was a five-year balloon note andthe entire balance on the note was due in1990. Chester refinanced the debt in 1990with a new 20-year mortgage. The refinanceddebt is treated as grandfathered debt for itsentire term (20 years).

Line-of-credit mortgage. If you had a line-of-credit mortgage on October 13, 1987, andborrowed additional amounts against it afterthat date, then the additional amounts are ei-ther home acquisition debt or home equitydebt depending on how you used the pro-ceeds. The balance on the mortgage before

you borrowed the additional amounts isgrandfathered debt. The newly borrowedamounts are not grandfathered debt becausethe funds were borrowed after October 13,1987. See Mixed-use mortgagesunder Aver-age Mortgage Balance in the Table 1 In-structionsthat follow.

Table 1 InstructionsYou can deduct all of the interest you paidduring the year on mortgages secured byyour main home or second home in either ofthe following two situations.

1) All the mortgages are grandfathereddebt.

2) The total of the mortgage balances forthe entire year is within the limits dis-cussed earlier under Home AcquisitionDebtand Home Equity Debt.

In either of those cases, you do not needTable 1. Otherwise, you may use Table 1 todetermine your qualified loan limit anddeductible home mortgage interest.

TIPFill out only oneTable 1 for both yourmain and second home regardless ofhow many mortgages you have.

Home equity debt only. If all of your mort-gages are home equity debt, do not fill in lines

1 through 5. Enter zero on line 6 and com-plete the rest of the worksheet.

Average Mortgage BalanceYou have to figure the average balance ofeach mortgage to determine your qualifiedloan limit. You need these amounts to com-plete lines 1, 2, and 9 of the worksheet. Youcan use the highest mortgage balances dur-ing the year to complete the worksheet, butyou may benefit most by using the averagebalances. The following are methods you canuse to figure your average mortgage bal-ances. However, if a mortgage has more thanone category of debt, see Mixed-use mort-gageslater in this section.

Average of first and last balance method.You can use this method if all the followingapply.

1) You did not borrow any new amounts onthe mortgage during the year. (This doesnot include borrowing the original mort-gage amount.)

2) You did not prepay more than onemonth's principal during the year. (Thisincludes prepayment by refinancing yourhome or by applying proceeds from its

sale.)3) You had to make level payments at fixed

equal intervals on at least a semi-annualbasis. You treat your payments as leveleven if they were adjusted from time totime because of changes in the interestrate.

To figure your average balance,complete the following worksheet.

Interest paid divided by interest ratemethod. You can use this method if at alltimes in 1999 the mortgage was secured byyour qualified home and the interest was paidat least monthly.

Complete the following worksheet tofigure your average balance.

Example. Mr. Blue had a line of creditsecured by his main home all year. He paidinterest of $2,500 on this loan. The interestrate on the loan was 9% (.09) all year. Hisaverage balance using this method is$27,778, figured as follows.

Statements provided by your lender. If youreceive monthly statements showing theclosing balance or the average balance forthe month, you can use either to figure youraverage balance for the year. You can treatthe balance as zero for any month the mort-gage was not secured by your qualified home.

For each mortgage, figure your averagebalance by adding your monthly closing oraverage balances and dividing that total bythe number of months the home secured bythat mortgage was a qualified home duringthe year.

If your lender can give you your averagebalance for the year, you can use thatamount.

Example. Ms. Brown had a home equityloan secured by her main home all year. Shereceived monthly statements showing her

average balance for each month. She mayfigure her average balance for the year byadding her monthly average balances anddividing the total by 12.

Mixed-use mortgages. A mixed-use mort-gage is a loan that consists of more than oneof the three categories of debt (grandfathereddebt, home acquisition debt, and home equitydebt). For example, a mortgage you took outduring the year is a mixed-use mortgage ifyou used its proceeds partly to refinance amortgage that you took out in an earlier yearto buy your home (home acquisition debt) andpartly to buy a car (home equity debt).

Complete lines 1 and 2 of Table 1 by in-cluding the separate average balances of any

grandfathered debt and home acquisitiondebt in your mixed-use mortgage. Do not usethe methods described earlier in this sectionto figure the average balance of either cate-gory. Instead, for each category, use the fol-lowing method.

1) Figure the balance of that category ofdebt for each month. This is the amountof the loan proceeds allocated to thatcategory, reduced by your principal pay-ments on the mortgage previously ap-plied to that category. Principal pay-ments on a mixed-use mortgage areapplied in full to each category of debt,until its balance is zero, in the followingorder:

a) First, any home equity debt,b) Next, any grandfathered debt, and

c) Finally, any home acquisition debt.

2) Add together the monthly balances fig-ured in (1).

3) Divide the result in (2) by 12.

Complete line 9 of Table 1 by including theaverage balance of the entire mixed-usemortgage, figured under one of the methodsdescribed earlier in this section.

Example 1. In 1986, Sharon took out a$1,400,000 mortgage to buy her main home(grandfathered debt). On March 2, 1999,when the home had a fair market value of$1,700,000 and she owed $1,100,000 on themortgage, Sharon took out a second mort-gage for $200,000. She used $180,000 of theproceeds to make substantial improvementsto her home (home acquisition debt) and theremaining $20,000 to buy a car (home equitydebt). Under the loan agreement, Sharonmust make principal payments of $1,000 atthe end of each month. During 1999, herprincipal payments on the second mortgagetotaled $10,000.

To complete line 2 of Table 1, Sharonmust figure a separate average balance forthe part of her second mortgage that is homeacquisition debt. The January and February

1. Enter the balance as of the first dayof the year that the mortgage wassecured by your qualified home dur-ing the year (generally January 1) ....

2. Enter the balance as of the last dayof the year that the mortgage was

secured by your qualified home dur-ing the year (generally December 31)

3. Add amounts on lines 1 and 2 ..........4. Divide the amount on line 3 by 2.

Enter the result ..................................

1. Enter the interest paid in 1999. Do notinclude points or any other interest paid

in 1999 that is for a year after 1999.However, do include interest that is for1999 but was paid in an earlier year .. .

2. Enter the annual interest rate on themortgage. If the interest rate varied in1999, use the lowest rate for the year .

3. Divide the amount on line 1 by theamount on line 2. Enter the result .......

1. Enter the interest paid in 1999. Do not

include points or any other interest paidin 1999 that is for a year after 1999.However, do include interest that is for1999 but was paid in an earlier year ... $2,500

2. Enter the annual interest rate on themortgage. If the interest rate varied in1999, use the lowest rate for the year . .09

3. Divide the amount on line 1 by theamount on line 2. Enter the result ....... $27,778

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Table 1. Worksheet To Figure Your Qualified Loan Limit and Deductible Home MortgageInterest For the Current Year

(Keep for your records.) See the Table 1 Instructions.

Part I Qualified Loan Limit

Part II Deductible Home Mortgage Interest

1

2

34

5

6

7

8

9

10

11

12

13

Enter the average balance of all your grandfathered debt. See line 1 instructions

Enter the average balance of all your home acquisition debt. See line 2 instructions

Enter $1,000,000 ($500,000 if married filing separately)Enter the larger of the amount on line 1 or the amount on line 3

Add the amounts on lines 1 and 2. Enter the total here

Enter the smaller of the amount on line 4 or the amount on line 5

Enter $100,000 ($50,000 if married filing separately). See line 7 instructions for a limit thatmay apply

Add the amounts on lines 6 and 7. Enter the total. This is your qualified loan limit

Enter the total of the average balances of all mortgages on all qualified homes. See line 9instructions

If line 8 is less than line 9, GO ON to line 10.

If line 8 is equal to or more than line 9, STOP HERE. All of your interest on all the mortgagesincluded on line 9 is deductible as home mortgage interest on Schedule A (Form 1040).

Enter the total amount of interest that you paid. See line 10 instructions

Divide the amount on line 8 by the amount on line 9. Enter the result as a decimal amount(rounded to three places)

Multiply the amount on line 10 by the decimal amount on line 11. Enter the result. This is yourdeductible home mortgage interest. Enter this amount on Schedule A (Form 1040)

Subtract the amount on line 12 from the amount on line 10. Enter the result. This is nothome mortgage interest. See line 13 instructions

.

1

2

3

4

5

6

7

8

9

10

11

12

13

balances were zero. The March through De-cember balances were all $180,000, because

none of her principal payments are applied tothe home acquisition debt. (They are all ap-plied to the home equity debt, reducing it to$10,000 [$20,000 $10,000].) The monthlybalances of the home acquisition debt total$1,800,000 ($180,000 10). Therefore, theaverage balance of the home acquisition debtfor 1999 was $150,000 ($1,800,000 12).

Example 2. The facts are the same as inExample 1. In 2000, Sharon's Januarythrough October principal payments on hersecond mortgage are applied to the homeequity debt, reducing it to zero. The balanceof the home acquisition debt remains$180,000 for each of those months. Becauseher November and December principal pay-

ments are applied to the home acquisitiondebt, the November balance is $179,000($180,000 $1,000) and the December bal-ance is $178,000 ($180,000 $2,000). Themonthly balances total $2,157,000 [($180,000 10) + $179,000 + $178,000]. Therefore, theaverage balance of the home acquisition debtfor the year 2000 is $179,750 ($2,157,000 12).

Line 1

Figure the average balance for the currentyear of each mortgage you had on all qual-ified homes on October 13, 1987 (grandfa-thered debt). Add the results together and

enter the total on line 1. Include the averagebalance for the current year for any grandfa-

thered debt part of a mixed-use mortgage.

Line 2Figure the average balance for the currentyear of each mortgage you took out on allqualified homes after October 13, 1987, tobuy, build, or substantially improve the home(home acquisition debt). Add the results to-gether and enter the total on line 2. Includethe average balance for the current year forany home acquisition debt part of a mixed-use mortgage.

Line 7The amount on line 7 cannot be more than

the smallerof:

1) $100,000 ($50,000 if married filing sep-arately), or

2) The total of each home's fair marketvalue (FMV) reduced (but not belowzero) by the amount of its home acqui-sition debt and grandfathered debt. De-termine the FMV and the outstandinghome acquisition and grandfathereddebt for each home on the date that thelast debt was secured by the home.

See Home equity debt limit under HomeEquity Debt, earlier, for more informationabout fair market value.

Line 9

Figure the average balance for the currentyear of each outstanding home mortgage.Add the average balances together and enterthe total on line 9. See Average MortgageBalance, earlier. Note:When figuring the av-erage balance of a mixed-use mortgage, forline 9 determine the average balance of theentire mortgage.

Line 10If you make payments to a financial institu-tion, or to a person whose business is makingloans, you should get Form 1098 or a similarstatement from the lender. This form will showthe amount of interest to enter on line 10 ofthe worksheet. Also include on this line anyother interest payments made on debts se-cured by a qualified home for which you didnot receive a Form 1098. Do not includepoints on this line.

Claiming your deductible points. Figureyour deductible points as follows.

1) Figure your deductible points for thecurrent year using the rules explainedunder Pointsin Part I.

2) Multiply the amount in item (1) by thedecimal amount on line 11 of the work-sheet. Enter the result on Schedule A(Form 1040), line 10 or 12, whicheverapplies. This amount is fully deductible.

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3) Subtract the amount in item (2) from theamount in item (1). This amount is notdeductible as home mortgage interest.However, if you used any of the loanproceeds for business or investment ac-tivities, see the instructions for line 13of the worksheet, next.

Line 13You cannotdeduct the amount of interest online 13 of the worksheet as home mortgageinterest. If you did not use any of the pro-

ceeds of any mortgage included on line 9 ofthe worksheet for business, investment, orother deductible activities, then all the intereston line 13 is personal interest. Personal in-terest is not deductible.

If you did use all or part of any mortgageproceeds for business, investment, or otherdeductible activities, the part of the interest

on line 13 that is allocable to those activitiesmay be deducted as business, investment,or other deductible expense, subject to anylimits that apply. Table 2shows where to de-duct that interest. See Allocation of Interestin chapter 8 of Publication 535 for an expla-nation of how to determine the use of loanproceeds.

The following two rules describe how toallocate the interest on line 13 to a businessor investment activity.

1) If you used all of the proceeds of themortgages on line 9 for one activity, thenall the interest on line 13 is allocated tothat activity. In this case, deduct the in-terest on the form or schedule to whichit applies.

2) If you used the proceeds of the mort-gages on line 9 for more than one activ-

ity, then you can allocate the interest online 13 among the activities in any man-ner you select (up to the total amountof interest otherwise allocable to eachactivity, explained next).

You figure the total amount of interestotherwise allocable to each activity by multi-plying the amount on line 10 of the worksheetby the following fraction.

Amount on line 9 of the worksheetallocated to that activity

Total amount on line 9

Example. Don had two mortgages (A andB) on his main home during the entire year.Mortgage A had an average balance of$90,000, and mortgage B had an averagebalance of $110,000.

Don determines that the proceeds ofmortgage A are allocable to personal ex-penses for the entire year. The proceeds ofmortgage B are allocable to his business forthe entire year. Don paid $14,000 of intereston mortgage A and $16,000 of interest onmortgage B. He figures the amount of homemortgage interest he can deduct by usingTable 1. Since both mortgages are home eq-uity debt, Don determines that $15,000 of the

interest can be deducted as home mortgageinterest.

The interest Don can allocate to his busi-ness is the smallerof:

1) The amount on line 13 of the worksheet($15,000), or

2) The total amount of interest allocable tothe business ($16,500), figured bymultiplying the amount on line 10 (the$30,000 total interest paid) by the fol-lowing fraction.

$110,000 (the average balanceof the mortgage allocated

to the business)

$200,000 (the total averagebalance of all mortgages

line 9 of the worksheet)

Because $15,000 is the smaller of items(1) and (2), that is the amount of interest Doncan allocate to his business. He deducts thisamount on his Schedule C (Form 1040).

Table 2. Where To Deduct Your Interest

Type of interest Where todeduct

Where to findinformation

Deductible home mortgage interest andpoints reported on Form 1098

Deductible home mortgage interest notreported on Form 1098

Points not reported on Form 1098

Investment interest (other than incurredto produce rents or royalties)

Business interest (non-farm)

Farm business interest

Interest incurred to produce rents orroyalties

Personal interest

Schedule A (Form1040), line 10




Schedule C or C-EZ(Form 1040)

Schedule F (Form

1040)Schedule E (Form1040)

Publication 936

Publication 550

Publication 535

Publications 225 and

535Publications 527 and535

Not deductible

Publication 936

Publication 936

Student loan interest Form 1040, line 24 orForm 1040A, line 16

Publication 970

Page 11


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How To Get MoreInformationYou can order free publications and forms,ask tax questions, and get more informationfrom the IRS in several ways. By selecting themethod that is best for you, you will havequick and easy access to tax help.

Free tax services. To find out what servicesare available, get Publication 910, Guide toFree Tax Services. It contains a list of free taxpublications and an index of tax topics. It alsodescribes other free tax information services,including tax education and assistance pro-grams and a list of TeleTax topics.

Personal computer. With your per-sonal computer and modem, you canaccess the IRS on the Internet at

www.irs.gov. While visiting our web site, youcan select:

Frequently Asked Tax Questions(locatedunder Taxpayer Help & Ed) to find an-swers to questions you may have.

Forms & Pubsto download forms andpublications or search for forms and

publications by topic or keyword. Fill-in Forms(located under Forms &

Pubs) to enter information while the formis displayed and then print the completedform.

Tax Info For Youto view Internal Reve-nue Bulletins published in the last fewyears.

Tax Regs in Englishto search regulationsand the Internal Revenue Code (underUnited States Code (USC)).

Digital Dispatchand IRS Local News Net(both located under Tax Info For Busi-ness) to receive our electronic newslet-ters on hot tax issues and news.

Small Business Corner(located underTax Info For Business) to get informationon starting and operating a small busi-ness.

You can also reach us with your computerusing File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phoneattached to your fax machine, you canreceive forms and instructions by

calling 7033689694. Follow the directionsfrom the prompts. When you order forms,enter the catalog number for the form youneed. The items you request will be faxed toyou.

Phone. Many services are availableby phone.

Ordering forms, instructions, and publi-cations. Call 18008293676 to ordercurrent and prior year forms, instructions,and publications.

Asking tax questions. Call the IRS withyour tax questions at 18008291040.

TTY/TDD equipment. If you have accessto TTY/TDD equipment, call18008294059 to ask tax questions orto order forms and publications.

TeleTax topics. Call 18008294477 tolisten to pre-recorded messages coveringvarious tax topics.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professional

answers, we evaluate the quality of our tele-phone services in several ways.

A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than oneweek and use them only to measure thequality of assistance.

We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

Walk-in. You can walk in to manypost offices, libraries, and IRS officesto pick up certain forms, instructions,

and publications. Also, some libraries and IRSoffices have:

An extensive collection of products avail-able to print from a CD-ROM or photo-copy from reproducible proofs.

The Internal Revenue Code, regulations,Internal Revenue Bulletins, and Cumula-tive Bulletins available for research pur-poses.

Mail. You can send your order forforms, instructions, and publicationsto the Distribution Center nearest to

you and receive a response within 10 work-days after your request is received. Find theaddress that applies to your part of thecountry.

Western part of U.S.:Western Area Distribution CenterRancho Cordova, CA 957430001

Central part of U.S.:Central Area Distribution CenterP.O. Box 8903Bloomington, IL 617028903

Eastern part of U.S. and foreign ad-dresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 232615074

CD-ROM. You can order IRS Publi-cation 1796, Federal Tax Products onCD-ROM, and obtain:

Current tax forms, instructions, and pub-lications.

Prior-year tax forms, instructions, andpublications.

Popular tax forms which may be filled inelectronically, printed out for submission,and saved for recordkeeping.

Internal Revenue Bulletins.

The CD-ROM can be purchased fromNational Technical Information Service (NTIS)by calling 18772336767 or on the Internetat www.irs.gov/cdorders. The first releaseis available in mid-December and the finalrelease is available in late January.

IRS Publication 3207, Small BusinessResource Guide, is an interactive CD-ROMthat contains information important to smallbusinesses. It is available in mid-February.You can get one free copy by calling18008293676.

Page 12


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Index

AAcquisition debt ........................... 7

Assistance (SeeMore information)

BBusiness, mortgage proceeds used

for ........................................... 7

CCooperative apartment owner . 4, 7Credit, mortgage interest ............. 4

DDivorced or separated individuals 4

EEquity debt .................................. 8

FForm:

1098 ................................... 6, 78396 ....................................... 4

Free tax services ....................... 12

GGrandfathered debt ..................... 8

HHelp (SeeMore information) Home:

Acquisition debt ...................... 7Construction ........................... 3Destroyed ............................... 3Divided use ............................ 2Equity debt ............................. 8

Improvement loan, points ....... 6

Main ........................................ 2Qualified ................................. 2Rented ............................ 2, 3, 4

Sale of .................................... 4Second ................................... 2

Housing allowance:Military .................................... 4Ministers ................................. 4

How to report ............................... 7

IInterest:

Personal ................................. 1Prepaid ................................... 4

Investment, mortgage proceedsused for .................................. 7

LLate payment charge .................. 4Limits:Home acquisition debt ........... 7Home equity debt ................... 8

Itemized deductions ............... 1

Line-of-credit mortgage ............... 9

MMain home ................................... 2Married taxpayers ........................ 4

Military housing allowance .......... 4Minister's housing allowance ...... 4

Mixed-use mortgage .................... 9

More information ....................... 12Mortgage interest:Credit ...................................... 4

How to report ......................... 7Late payment charge ............. 4Limits on deduction ................ 7

Refunds .............................. 4, 7Statement ............................... 6

Mortgage:Assistance payments ............. 4Line-of-credit .......................... 9Mixed-use ............................... 9Prepayment penalty ............... 4

Proceeds invested in tax-exempt securities .............. 4

Refinanced ..................... 6, 7, 8Wraparound ............................ 2

P Personal interest ......................... 1Points ........................................... 4Prepaid interest ....................... 4, 7Prepayment penalty .................... 4

Publications (SeeMore information)

QQualified home ............................ 2

RRedeemable ground rents ........... 4

Refinancing:Grandfathered debt ................ 8

Home acquisition debt ........... 7

Points, deductibility ................ 6Refunds ................................... 4, 7

Renting home ...................... 2, 3, 4

SSale of home ............................... 4

Second home .......................... 2, 6Secured debt ............................... 2Seller-paid points ......................... 6

TTax help (SeeMore information) Tax-exempt securities, mortgage

proceeds invested in .............. 4Time-sharing ................................ 3TTY/TDD information ................ 12

WWraparound mortgage ................ 2

Page 13


14/14

Tax Publications for Individual Taxpayers

General Guides

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)Farmers Tax GuideTax Guide for Small BusinessTax Calendars for 2000Highlights of 1999 Tax Changes

Guide to Free Tax Services

Specialized Publications

Armed Forces Tax GuideFuel Tax Credits and RefundsTravel, Entertainment, Gift, and CarExpensesExemptions, Standard Deduction,and Filing InformationMedical and Dental ExpensesChild and Dependent Care ExpensesDivorced or Separated IndividualsTax Withholding and Estimated TaxTax Benefits for Work-RelatedEducationForeign Tax Credit for IndividualsU.S. Government Civilian EmployeesStationed AbroadSocial Security and OtherInformation for Members of theClergy and Religious WorkersU.S. Tax Guide for AliensScholarships and FellowshipsMoving ExpensesSelling Your HomeCredit for the Elderly or the DisabledTaxable and Nontaxable IncomeCharitable ContributionsResidential Rental Property

Commonly Used Tax Forms

Miscellaneous Deductions

Tax Information for First-TimeHomeownersReporting Tip IncomeSelf-Employment TaxDepreciating Property Placed inService Before 1987Installment SalesPartnershipsSales and Other Dispositions ofAssetsCasualties, Disasters, and Thefts(Business and Nonbusiness)Investment Income and ExpensesBasis of AssetsRecordkeeping for IndividualsOlder Americans Tax GuideCommunity PropertyExamination of Returns, AppealRights, and Claims for RefundSurvivors, Executors, andAdministratorsDetermining the Value of DonatedPropertyMutual Fund DistributionsTax Guide for Individuals WithIncome From U.S. Possessions

Pension and Annuity IncomeCasualty, Disaster, and Theft LossWorkbook (Personal-Use Property)Business Use of Your Home(Including Use by Day-CareProviders)Individual Retirement Arrangements(IRAs) (Including Roth IRAs andEducation IRAs)Tax Highlights for U.S. Citizens andResidents Going AbroadUnderstanding the Collection ProcessEarned Income Credit (EIC)Tax Guide to U.S. Civil ServiceRetirement Benefits

Tax Highlights for Persons withDisabilitiesBankruptcy Tax GuideDirect SellersSocial Security and EquivalentRailroad Retirement BenefitsHow Do I Adjust My Tax Withholding?Passive Activity and At-Risk RulesHousehold Employers Tax GuideTax Rules for Children andDependentsHome Mortgage Interest DeductionHow To Depreciate PropertyPractice Before the IRS and Powerof AttorneyIntroduction to Estate and Gift TaxesIRS Will Figure Your Tax

Per Diem RatesReporting Cash Payments of Over$10,000The Taxpayer Advocate Service of

the IRS

Derechos del ContribuyenteCmo Preparar la Declaracin deImpuesto Federal

Crdito por Ingreso del TrabajoEnglish-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

U.S. Tax Treaties

Spanish Language Publications

Tax Highlights for CommercialFishermen

910

595

553509334225

171

3378463

501

502503504505508

514516

517

519520521523524525526527529

530

531533534

537

544

547

550551552554

541

555556

559

561

564570

575584

587

590

593

594596721

901907

908

915

919925926929

946

911

936

950

1542

967

1544

1546

596SP

1SP

850

579SP

Comprendiendo el Proceso de Cobro594SP

947

Tax Benefits for Adoption968

Informe de Pagos en Efectivo enExceso de $10,000 (Recibidos enuna Ocupacin o Negocio)

1544SP

See How To Get More Information for a variety of ways to get forms, including by computer,

fax, phone, and mail. For fax orders only, use the catalog numbers when ordering.

U.S. Individual Income Tax ReturnItemized Deductions & Interest andOrdinary Dividends

Profit or Loss From BusinessNet Profit From Business

Capital Gains and Losses

Supplemental Income and LossEarned Income Credit

Profit or Loss From Farming

Credit for the Elderly or the Disabled

Income Tax Return for Single andJoint Filers With No Dependents

Self-Employment TaxU.S. Individual Income Tax ReturnInterest and Ordinary Dividends forForm 1040A FilersChild and Dependent CareExpenses for Form 1040A FilersCredit for the Elderly or theDisabled for Form 1040A Filers

Estimated Tax for IndividualsAmended U.S. Individual Income Tax Return

Unreimbursed Employee BusinessExpenses

Underpayment of Estimated Tax byIndividuals, Estates, and Trusts

Power of Attorney and Declarationof Representative

Child and Dependent Care Expenses

Moving ExpensesDepreciation and AmortizationApplication for Automatic Extension of TimeTo File U.S. Individual Income Tax ReturnInvestment Interest Expense DeductionAdditional Taxes Attributable to IRAs, Other

Qualified Retirement Plans, Annuities,Modified Endowment Contracts, and MSAsAlternative Minimum TaxIndividualsNoncash Charitable Contributions

Change of AddressExpenses for Business Use of Your Home

Nondeductible IRAsPassive Activity Loss Limitations

1040Sch A & B

Sch CSch C-EZSch D

Sch ESch EICSch FSch H Household Employment Taxes

Sch R

Sch SE

1040EZ

1040ASch 1

Sch 2

Sch 3

1040-ES1040X

2106 Employee Business Expenses2106-EZ

2210

24412848

390345624868

49525329

6251828385828606

88228829

Form Number and TitleCatalogNumber

Sch J Farm Income Averaging

Additional Child Tax Credit8812

Education Credits8863

CatalogNumber

1170020604

11744

1186211980

124901290613141

1317713329

1360062299637046396610644120811323225379

11320

Form Number and Title

11330

113341437411338

113441333911346121872551311359

113581132712075

10749

12064

11329

1134011360

See How To Get More Information for a variety of ways to get publications,including by computer, phone, and mail.

970 Tax Benefits for Higher Education971 Innocent Spouse Relief

Sch D-1 Continuation Sheet for Schedule D 10424

972 Child Tax Credit

us internal revenue service: p936--1999

Documents