I have a rental property that pretty much breaks even each year, give or take a grand. But Iw as thinking what if I made a few extra mortgage payments, applied them to principal, before year's end and then book a larger loss than I might have ordinarily. Can I do this? Limits?
Payments of loan principal are not deductible. Therefore, making a few extra mortgage payments would not lower your taxable income.
If I make 12 extra payments before the end of the year, can I use that addtional mortgage interest as an expense to calculate profit and loss on the proprty for the current tax year?
Just to be clear, I am not looking to deduct principal; I am looking to enlarge a tax-deductibe loss on a rental property for a given year.
Prepaid interest is not deductible, even by a cash-basis taxpayer, until it accrues.
If you make extra payments then your total interest for the year will actually be lower, not higher. So your deduction will be lower. This is because when you make a greater principal payment than scheduled, the interest for the following month will be less than it would have been (because the principal it is calculated on is lower).
Doing that can significantly reduce your total interest costs over the life of the loan. But it won't increase your deductions.
Unless you have a very peculiar mortgage, extra payments are credited entirely to principal. The interest due each month is based on the outstanding principal that month, so the more you prepay, the less interest you will owe and the more of each payment that is credited to principal.
Prepaying is a fine way to pay off your mortgage, but there's no way to increase the interest you pay short of refinancing with a larger balance or higher rate.
R's, John
Prepaid interest is deductible in full the year you purchase your home, or use the loan to improve your home.
I'm not sure what you are trying to say here, but:
"Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, discussed later. " Pub 17; Pub 936.
He's talking about points to buy down the interest rate on a home mortgage that qualifies as acquisition indebtedness. It is an exception to the general rule you quoted.
However, if these points are paid to the same lender, don't they have to be amortized, not fully deducted?
If it is a new additional loan that happens to be from the same lender, and points were paid on this new loan, then the points on this new loan only would be fully deductible if the loan is used to improve the home. Points paid to refinance the original/main loan must be amortized over the life of the loan, though I guess if you refinance in Jan/2010 and sell your house in Jun/2010, then you can deduct all the points in 2010.
Deduction Allowed in Year Paid
You can fully deduct points in the year paid if you meet all the following tests. (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid.)
Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.) 2.
Paying points is an established business practice in the area where the loan was made. 3.
The points paid were not more than the points generally charged in that area. 4.
You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method. 5.
The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 6.
The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker. 7.
You use your loan to buy or build your main home. 8.
The points were computed as a percentage of the principal amount of the mortgage. 9.
The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.
Note.
If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Home improvement loan. You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met.
If points on the old mortgage were being amortized, they have to continue being amortized over the new mortgage term if both mortgages are issued by the same lender. Otherwise, the borrower can deduct the remaining unamortized points from the old loan.
If there is cash out on the new mortgage used for improvements on the personal residence, the borrower has the option of immediately deducting an appropriate proportion of the points on the new loan. Otherwise, points on the new loan have to be amortized over the life of the new loan.
Are you sure?
Test 7 below pointedly (deliberate) omits "improve."
True, but read on. I also quoted:
Home improvement loan. You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met.
OK. I shouldn't try speed reading :-)
This is a rental property. Points (if any) must be amortized.
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