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Wednesday, December 15, 2010

Tax Tip - Interest Deduction on Form 1040 - 2010

There are three basic types of interest as per the IRS:

Business related interest
Mortgage interest on residential property
Personal interest

Business related interest is beyond to scope of this discussion.  While it can appear on Form 1040 on Schedules C, E, F, and other forms, this information relates to itemized deductions on Form 1040, Schedule A (residential mortgage interest).

Interest that is not business related and not mortgage interest on residential property is generally personal interest.  Personal interest is not deductible even for those who itemize their deductions.

Mortgage interest on residential property includes equity lines up to $100,000 ($50,000 for a married person filing separate returns).  So money borrowed for personal use, such as a personal automobile, may become deductible if it is borrowed on a equity line totaling less than $100,000 (or $50,000 for married filing separate).  Primary mortgage interest is deductible if the borrowed money is used to acquire or improve qualified residential property.  Qualified residential property includes the primary residence and one secondary residence.  Thus, mortgage interest, including equity lines up to $100,000 (or $50,000 for married filing separate) can be deducted on two homes.  A home, while primarily real estate, can include a houseboat, mobile home, or motor home if they include sleeping, bath, and kitchen facilities.  Additionally, qualifying relates to how the property is used rather than how it is owned.  There are special rules in determining how much usage makes a residence primary, or principle, and for married persons filing separate returns.  When an equity line exceeds $100,000 (or $50,000 for married filing separate) interest paid on the excess is personal interest and a pro-rata portion is allocated between deductible and non-deductible.

If a payment is made on December 31, 2010, or before, any associated 2010 interest is deductible on a 2010 1040 even if the due date of the payment is subsequent to December 31, 2010.

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