New Reporting Requirements for Lenders

Some individuals who think that all of the interest that is reported by home mortgage lenders on the Form 1098 may end up with a very unpleasant surprise when they are ready to file their tax returns. For the majority, the entire amount of the interest cannot be deducted and Congress has created new reporting requirements for lenders who can assist IRS with identifying taxpayers who are taking deductions that are higher than they are entitled to.

Deductible home mortgage interest only includes interest on acquisition debt (up to $1 million of debt) and equity debt interest on up to $100,000 of equity debt that has been secured by the taxpayer's primary residence and a designated second residence. Acquisition debt is debt that is used to acquire or significantly improve the taxpayer's primary or second residence. Equity debt refers to debt that is not used for acquiring or significantly improving one of those residences (this basically means cash equity taken for other reasons).

To detect taxpayers who are deducting more than their portion of home mortgage interest, the IRS will require that lenders report on Form 1098, the:

  • Date the loan was initiated - this factor is used to figure out if the loan is a loan that has been refinanced and if the amount of interest that has been deducted is possibly more than the acquisition and equity debt limits.
  • The balance that is remaining on the mortgage as of the first day of the tax year - also a factor that is used to determine if the interest that has been deducted is greater than the acquisition and equity debt limits.
  • The address for the property that is secured by the mortgage. The information will permit the IRS to determine if the taxpayer has included interest from more than the permitted primary residence and the one secondary residence. The address can also be used to figure out the interest on motor homes and boats, which can be deducted as home mortgage interest if the taxpayer’s primary or secondary residence is the motor home and boat.

Taxpayers who have submitted Form 1098 data which indicates non-compliance can expect correspondence audits and to have the home mortgage interest reviewed as a part of an office audit.

Another issue regarding mortgage interest can occur when taxpayers opt to use home mortgages for financing rentals, businesses and other typically deductible uses. However, they may also be allocating the interest between home mortgage interest and business or investment interest in an improper manner, which could result in an adjustment by the IRS.

If you have concerns about your home mortgage interest deduction compliance or you believe that in the past you have not been in compliance, please call us today.

Confused about your mortgage interest deductions? Give us a call at (770) 268-3434 for a consultation!