May 042017

Wash. D.C. NSTP

In Singh v. Commissioner, the Tax Court in a summary opinion held that a taxpayer was not entitled to deduct the amounts paid in respect of points on a refinancing of a principal residence. Determining whether interest on a home is deductible is complicated by the reality that for many taxpayers information returns or settlement statements may not completely or accurately indicate the amount that can be deducted. One such issue relates to when  consumers are paying interest on a modified mortgage the Form 1098 that most financial institutions issue does not reflect the amounts that were attributable to the accrued but unpaid interest at the time of the modification.

Part of the costs that Singh paid included points on the interest only refinancing. To the extent that the points represent interest taxpayers may deduct the points over the course of the loan. This sweeps in Section 461(g), which requires a cash basis taxpayer to amortize prepaid interest over the life of the loan, just as if the taxpayer were on the accrual method of accounting. The Tax Court noted that Singh could not deduct the points even under the general Section 461(g) authority, which treats the points as amortized over the life of the loan, as Singh’s loan was for an interest only loan for an indefinite period.

The upshot for Singh was no deduction, and accuracy related penalties for good measure. This is a good reminder that the deductibility of interest on residences is sometimes not just a matter of relying on the information off a form 1098 or settlement document. The newly designed form 1098 now includes the mortgage balance at the end of the year, address of the property that holds the mortgage as well as the guarantors of the loan.

  •  05/04

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