Special Mortgage Situations

This is the third in a series of four articles on home mortgage interest. (Read Part I and Part II). There are several special situations relating to deductions for home mortgage interest and other costs. This is a brief overview of each. You should check with your tax professional should any of these apply to you.

Have you ever been late on your payment? Face it, most of us have overlooked it and were late with a payment. And, of course, you were assessed a late charge. As long as it is just a late charge and not a fee for a specific service, the late charge is deductible as mortgage interest. A fee for a specific service would be an attorney fee, for example. Taking the reverse situation, you pay off the mortgage early, but are assessed a prepayment penalty. As with a late charge, it is deductible interest if it is not a fee for a specific service.

If you claim a mortgage interest credit on Form 8396, Mortgage Interest Credit, the amount of that credit reduces your mortgage interest deduction by the amount of the credit. The credit is for holders of qualified mortgage credit certificates issued by
state or local governmental units.

Ministers and certain members of the military may receive a tax-free housing allowance. Those receiving this allowance get a double dip, as the non-taxable allowance still allows a full mortgage interest deduction.

If a divorce or separation agreement requires a taxpayer to make mortgage payments on a jointly owned home occupied by the other spouse, the payment of interest may be treated as alimony.

You are building your dream home. In the process you obtain a construction loan. Is the interest paid on this loan deductible mortgage interest? Maybe. You can deduct construction loan interest for up to 24 months beginning on or after the date construction begins. Interest incurred prior to the commencement of construction is non-deductible personal interest. In addition, the home must be occupied as your main or second home upon completion, or there is no deduction.

What if you have a second home, but it is located in beautiful Aruba, One Happy Island. Fear not, the interest on this residence is deductible. If you’re dealing with a foreign lender who does not issue a 1098 for the interest, report in on Schedule A, line 11 with an explanation attached.

Finally, a word of clarification in regard to the two-home limit: The law specifies that you may deduct interest on two personal residences during the year. Let’s suppose you have mortgages on two personal residences – your main home and a beach cottage. During the current year, you sell your main home and purchase another one, complete with mortgage. Three homes, three mortgages. You must choose which two mortgages you will use for the interest deduction. It doesn’t matter that you did not have three homes at the same time, you had three during the year, and only two are deductible.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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