Wednesday, May 20, 2015


In my opinion the area of the Tax Code where proper documentation and strict adherence to the law is perhaps the most overlooked (or actually ignored) is the deduction for mortgage interest – both on Schedule A and Form 6251 (Alternative Minimum Tax-Individuals).

As a reminder – there are three (3) kinds of mortgage debt –

1) Grandfathered debt – debt acquired on or before October 13, 1987, that was secured by a main residence or a qualified second home.  It does matter what the proceeds of the loan were used for, as long as the debt was secured by the property.

2) Acquisition debt - debt acquired after October 13, 1987, that was used to buy, build, or substantially improve a main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses.

3) Home equity debt – debt acquired after October 13, 1987, that is secured by a main residence or a qualified second home that is not used to buy, build, or substantially improve the property.  There is no restriction or limitation on what the money can be used for; you can use it to buy a car, to pay for college, or to pay down credit card balances. 

Interest on home equity debt is not deductible in calculating the dreaded Alternative Minimum Tax (AMT)

Taxpayers are required to keep separate track of acquisition debt and home equity debt, to make sure that the deduction on Schedule A does not include interest on debt principal that exceed the statutory maximums ($1 Million for acquisition debt and $100,000 for home equity debt – no limit on grandfathered debt), and to determine what interest deduction to add back on Form 6251 when calculating Alternative Minimum Taxable Income.

I firmly believe that 99.5% of taxpayers do not do this.  I do not know of any taxpayer who does. 

And I expect that the majority of tax preparers do not do this for their taxpayer clients.

Most taxpayers, and a large percentage of tax preparers, merely take the amount of “Mortgage interest received from payer(s)/borrower(s)” reported in Box 1 of the Form 1098 Mortgage Interest Statements and enter it on Line 10 of Schedule A. 

And similarly, most taxpayers, and a large percentage of tax preparers, do not include any adjustment to the Schedule A mortgage interest deduction on Line 4 of Form 6251.

It is sometimes easy to identify the difference between acquisition debt and home-equity debt if the taxpayer has one acquisition mortgage and a separate home equity loan and/or line of credit.  But home equity debt often arises from multiple refinancings and consolidations over an extended period of years.

To be fair to my fellow tax preparers, many do not adjust the Schedule A or Form 6251 deduction for home equity interest because their clients have not kept track of the separate types of debt and therefore do not provide separate principal or interest numbers.

The responsibility for keeping separate track of the two types of mortgage debt (actually three if you consider “grandfathered” mortgage debt) truly lies with the taxpayer client and not the tax preparer.

Obviously the best solution to this issue is to have boxes on the Form 1098 for “acquisition debt” principal and interest and “home equity debt” principal and interest, and require banks and other mortgage providers to properly report these amounts thereon.  But this would require a lot more information gathering and paperwork on the part of mortgage providers, and I doubt if the banking lobby would allow a law requiring this additional reporting to pass.

I have created a “Mortgage Interest Guide” as part of my Dollar Store of Tax Guides.  In this guide I explain the various types of mortgage debt and the deduction limitations, and go into detail on how refinancing an acquisition debt mortgage can result in home equity debt. 

I also include in this guide two worksheets – one for Acquisition Debt Activity and one for Home Equity Debt activity – and provide a detailed example of how to use the debt activity worksheets.  These worksheets will allow homeowners to keep a detailed record of the two types of mortgage debt – so that they will be able to properly complete their tax returns, or to provide the necessary information to their professional tax preparers.

As one would expect, the cost of this Mortgage Interest Guide, sent as a pdf email attachment, is only $2.00!  A printed copy sent via postal mail is $4.00.  {Check out my other Tax Deduction Guides}

Send your check or money order for $2.00, or $4.00, payable to TAXES AND ACCOUNTING, INC, to –



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