As our clients prepare for year-end, we like to remind them that the mortgage interest deduction is limited to the amount of interest actually paid on the loan during the year. Here’s an example from a recent tax court case:
A husband and wife arranged with their bank to have their mortgage modified. Under the terms of the new loan, all the past-due interest that had accrued on the old loan was rolled into the new loan. The bank issued Form 1098 to the couple, reporting the amount of interest it had received from them during that year. On their tax return, the couple deducted the amount of interest they paid plus all the interest that was capitalized into the principal of their modified mortgage loan. However, the Tax Court disallowed the deduction, concluding that the mortgage interest deduction is limited to the amount of interest actually paid on the loan during the year. The deduction can be claimed if and when the capitalized interest is paid.
If you have a special circumstance or questions about how your mortgage interest deduction should be taken, please contact your ShindelRock tax professional.
Reference: Charles Copeland, TC Memo 2014-226 (Tax Ct.)