Long after the initial burst of pride from buying a home subsides, the mortgage interest deduction continues. Usually, you receive a Form 1098 that shows the amount of mortgage interest you paid from your lender. However, if you are repaying a private party, such as the seller of the home or your rich uncle, you may have to jump through a few extra hoops to claim the mortgage interest deduction.
File your taxes using Form 1040 and itemize your deductions with Schedule A. Since mortgage interest is an itemized deduction whether you pay a big bank or a private party, you have to give up your standard deduction to claim the deduction.
Determine the amount of interest you paid on the mortgage during the tax year. If you have an amortization schedule, you can simply add the amounts in the "Interest" column that correspond to each payment you made during the year. The sum of your monthly interest payments represents the total interest you paid on your mortgage for the year. If you don't have an amortization schedule, it is easy to find free amortization calculators online.
Report the amount of deductible mortgage interest on line 10 of Schedule A if you received a Form 1098. If you didn't receive a Form 1098, report the interest paid on line 11 of Schedule A. Your deduction is limited to the interest on the first $1 million of mortgage debt -- or $500,000 if you are married filing separately).
Report the private party's name, address and taxpayer identification number next to the amount of the deduction on line 11 if you didn't receive a Form 1098 and the private party you're paying interest to is the home's seller. The taxpayer identification number can be the private party's Social Security number or employer identification number. This amount is added to your other itemized deductions. Then it's copied over to line 40 of your Form 1040 tax return, where it reduces your taxable income.
Items you will need
- IRS Form 1040
- IRS Schedule A
- If the private party doesn't charge you interest, you can't claim a tax deduction. For example, if your rich aunt gives you $300,000 to buy a home and doesn't charge you interest on the loan, you can't claim a deduction.
- If you need to use an amortization calculator to calculate your mortgage interest, follow the instructions carefully. If you're not confident in your ability to calculate your mortgage interest, consider consulting a tax professional.
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