Considerations on Interest Expense Deductions
As new mortgage loans and refinancing opportunities appearing in the market, it is important to understand how to treat the interest deduction for Federal tax proposes.
There are 3 classifications of interest for an individual Federal tax return and each is subject to different rules.
- Personal interest - which has two components
- Interest on a qualified residence.
- Interest on consumer debt.
- Investment interest
- Business Interest
- Business indebtedness interest
- Interest on rental income real estate
The fees and charges incurred as part of the mortgage loan funding must be analyzed and ultimately organized into two categories.
1 - Costs that do not quality as interest.
These are usually lending service costs on mortgages used to acquire real estate held for personal use.
Should the mortgage be obtained to acquire real estate used in business or held for profit, the costs are deductible by amortizing them over the life to the loan.
2 - Costs that do qualify as interest.
Those costs qualifying as interest are treated as prepaid interest. These costs are capitalized and amortized - on a straight line method - over the life of the loan. Generally, points, loan origination fees, premium changes, etc. are considered prepaid interest and amortized over the life of the loan.
This information is intended to provide a general background on the subject of interest deductions for personal tax considerations. While it is believed to be accurate, it does not cover all issues related to this subject, nor is it meant as a substitute for advise from your CPA, professional tax advisor or attorney. You should always consult with your own financial and tax advisors to discuss such matters.
