Next January when you receive your mortgage interest statement from your lender, you might notice some changes on the Form 1098. Beginning in 2016, the mortgage interest statements must reflect the outstanding principal balance, the loan origination date, and the address of the property that secures the mortgage. All of this is information that has not traditionally been included on the mortgage interest statement. However, due to the complexity in the laws in regard to the deductibility of mortgage interest, these are welcome changes. In a perfect world, everything would be simple and there would be no need for this information, but we must play the hand we are dealt. Let’s look at each of these requirements and the reasons for each.
The Outstanding Balance. Under current laws, taxpayers are limited to the amount of interest that may be deducted for personal residence interest. This limit is $1,000,000 for acquisition interest and $100,000 for home equity debt. These limits are per return, not per residence. Including these amounts on the 1098 can alert the taxpayer, the preparer, and the IRS when a taxpayer has interest exceeding the deductible amount.
The Origination Date. With the distinction between acquisition debt and home equity debt, it is important to be aware of these dates so the interest may be classified more readily as acquisition or home equity debt. This change also serves as an alert to any new loans obtained by the taxpayer.
The Address of the Subject Property. This feature makes it much simpler to apply the mortgage interest to the correct property. In most cases, this is not an issue, but if a taxpayer has mortgages on three residences that include acquisition and home-equity debt, it can be difficult to match the interest paid with a particular property. This is especially true if there are multiple mortgages with the same lending institution. In addition, if the taxpayer has rental properties, matching the interest expense with the correct property is simplified when the address of the subject property is included. It also serves as a confirmation of a mortgage on the property.
Tax issues are created, for example, if a taxpayer borrows money on a personal residence, but uses the proceeds on a rental property. The taxpayer may want to deduct the interest against the rental property, but it is not mortgage interest for the rental unit. This obstacle can be overcome, but this additional information can be quite helpful in proper completion of the return.
This feature also can alert interested parties as to the number of personal residences with mortgage debt. Under current law, individuals may not deduct interest on more than two personal residences during the year. When a taxpayer pays interest on multiple homes, having the property address identified makes it easier to maximize the legal deduction of mortgage interest.
The two residences rule can serve to trip up unsuspecting taxpayers. Suppose a taxpayer has a primary residence and a beach cottage, both with mortgages. At some point during the year, the taxpayer sells his or her primary residence and purchases a new home, complete with mortgage. That taxpayer now has interest expense on three homes and must choose which two homes on which to deduct interest. The rule is two homes during the year, not two homes at a time.
This article has not dealt with the distinction between acquisition debt and home equity debt and the limits associated with each. That’s another complex issue, but for another time. For taxpayers having only one residence and a mortgage far below $1,000,000, the interest deduction is fairly straightforward. For others, it might be a good idea to consul a CPA, Enrolled Agent or other qualified tax return preparer.
John Stancil- Tax Advisor
1 comment on “Changes in Your Mortgage Interest Statement”
About time! It’s frightening how many people with multiple properties can’t determine which interest statement goes with which property, especially when they own rental properties.
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