Because mortgage interest can be deducted on your tax return, mortgage lenders report that interest to the IRS. They also provide you with a 1098 form indicating the amount of mortgage interest you paid over the last year. Claiming the mortgage interest deduction can seem pretty straightforward, but it can sometimes create tax problems.
Here are a few common scenarios we frequently see:
- Unqualified homes. You can deduct mortgage interest on your primary home as well as a second home, but there are some requirements for this deduction to apply. For example, if you rent out a second home, you must use the home more than 10% of the days it is rented out; otherwise the property qualifies as a rental home and should be treated accordingly for tax purposes.
- Private party mortgages. When your mortgage loan is with a private party, rather than a mortgage lending institution, the mortgage interest is occasionally misreported or not documented correctly. The private party must report your name and SSN as well as the amount of mortgage interest paid, and, unfortunately, mistakes are common.
- Multiple individuals on the same loan. Sometimes when more than one person is on the same loan, lenders report the interest paid under only one of the borrowers’ names. This can create issues with one of the other borrowers claiming the mortgage interest on their tax return.
When the amount of mortgage interest claimed on your tax return does not match the mortgage interest your lender reported to the IRS or you deduct mortgage interest on an unqualified home, it will often trigger a correspondence audit. In many cases, you can clear up the confusion by submitting additional documentation. However, in some cases, you can end up facing tax penalties or other complications.
If you’re experiencing tax problems related to mortgage interest, don’t hesitate to call Taxation Solutions, Inc. Our team has more than 40 years of experience helping taxpayers just like you resolve tax issues large and small. Let us put our expertise to work for you. Call now!