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Home ownership comes with a variety of tax breaks, and the largest involves deducting your qualified home mortgage interest on your federal income tax return, provided you meet all criteria. As a homeowner, a portion of your monthly mortgage payment is allocated towards interest.
You should have received Form 1098 from your mortgage company or lender in late January or early February. Form 1098 is a mortgage interest statement which shows how much mortgage interest, points, and private mortgage insurance (also called PMI) that you paid during the previous year. Your lender is required by law to fill out the form and send it to the IRS.
This year's form has a few important differences from previous versions. In 2015, Congress passed new reporting rules which went into effect for tax year 2016. The newly designed Form 1098 requires lenders to disclose more information about your loan to the IRS, including the balance at the end of last year, the mortgage origination date (the date you took out your loan), and the address of the property securing the loan.
While the rules that limit the deductibility of mortgage interest have not changed, IRS enforcement of those regulations have changed effective the 2016 tax year. With the new information collected from Form 1098, the IRS will be able to identify just how much interest really is deductible on a property, and mortgage interest being deducted incorrectly will be caught and may trigger an audit. If you do receive an audit notice, you have 30 days to respond or the IRS can take action and automatically adjust your tax liability.
With that in mind, this is a good time to review the rules. Types of properties covered include a traditional home, mobile home, condominium, RV, boat, or 5th wheel trailer that provides basic living accommodations (sleeping space, toilet, cooking facilities). The loan must be secured by your primary residence or second home, and can be a mortgage, home equity loan, or home equity line of credit—in order to take the deduction, you must be legally liable for repaying the loan.
Deduction of mortgage interest is restricted to $1 million in acquisition debt, meaning debt used to buy, build, or improve a home, plus up to $100,0000 in home equity. If you have a mortgage, our Home Mortgage Worksheet can help you determine what portion of your mortgage interest is deductible. If you have specific questions about mortgage interest deductions, contact us today.