Lenders now must report more information about your mortgage to the IRS
If you’re like millions of homeowners, you recently received a familiar, innocuous-looking document from your lender. Called Form 1098, it totes up how much interest you paid on your mortgage last year. Your lender is required by law to fill it out and send it to the IRS.
But there are key differences in this year’s form that are easy to miss yet potentially important to you – differences that could trigger an audit by the IRS.
Under an obscure statutory change buried in a federal highway bill that passed Congress in the summer of 2015, your lender must now disclose more information to the IRS about your loan, including the amount of the outstanding principal balance at the beginning of the year, the origination date of your mortgage and the address of the home securing the loan.
What’s up with these changes? Although the IRS had no immediate comment when I asked whether it is ratcheting up its scrutiny of home-mortgage interest deductions, that appears to be the case. As one of the largest write-offs in the tax code – with a projected revenue cost of $357 billion between fiscal years 2016 and 2020 – the mortgage deduction is a fat target. In addition, the rules governing eligibility for taking deductions are complex, and government watchdog agencies have been critical of the IRS’s oversight of this area in years past.
The lack of crucial data points in the previous version of the 1098 form made it challenging for the IRS to determine whether some properties qualified for interest deductions and whether the claimed amounts were in sync with reported incomes or were based on mortgage amounts that exceeded the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”
Acquisition debt, according to IRS Publication 936, is the mortgage amount you use to “buy, build or substantially improve” your principal residence or second home. Home equity debt is mortgage money secured by your residence that you can use “for reasons other than” buying, building or improving your primary or second home. If your acquisition debt exceeds the $1 million limit, you can use up to $100,000 of home equity debt to extend the total deductible limit to $1.1 million.
Among the areas of potential exposure with the new Form 1098 for some homeowners, tax professionals say, are certain refinancings. Charles Benway, a CPA and certified financial planner with Main Street Financial in Mount Kisco, N.Y., told me many owners are not aware that when they pay down their original mortgage amount over a period of years, their acquisition debt for federal tax computation purposes declines. When they later refinance into a larger loan and use the proceeds for purposes other than buying, building or improving, a portion of the mortgage interest they pay to the lender may not be deductible.
Benway offered this hypothetical example, which was also included in an article he wrote for Kiplinger.com-
Say you buy a house