IRS Tightening Up On Mortgage Interest Deduction


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The IRS thinks too many people take mortgage interest deductions for their homes and are tightening up the rules.

First, let’s look at an important Tax Court case , (DeFrancis). In this case, the Court disallowed a deduction when a married couple borrowed money from the wife’s mother. This loan allowed them to buy a house and they make principal and interest payments, amortized over a 30 year period. So, on the face, it was just like millions of other home loans. The problem was that Mom never recorded the note. So, if the couple failed to make payments, she did not have the ability to take their house. But the couple had signed the note and guaranteed it. I’m not sure I agree with this decision because there was risk. But, whether I agree with it or not, it’s an important case to watch. Bottomline, if you borrow money from family members for your any purpose, make sure it’s recorded just like a note from a 3rd party would be.

The second change we’re seeing is that the IRS is proposing to make a change to Form 1098. This is the form that lenders give you each year to report the mortgage interest you paid. The proposed change would require the lender to also report the mortgage balance, property tax and loan origination date. They are watching to make sure homeowner’s aren’t taking a deduction for interest on loans over $100,000 for home equity lines.



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