Yesterday I worked on what I believe was our 7th or 8th mail-in audit received over the course of the past year regarding limitations on deductible mortgage interest. Without a doubt, the IRS is sending out more and more requests to individuals with large mortgage interest deductions who must, in turn, prove they are following the tax laws to a T.
Currently, taxpayers are allowed to deduct the interest paid on mortgage debt incurred to acquire, construct, or substantially improve their main or second home. This deduction, however, is limited to the interest paid on the first $1 million of acquisition indebtedness plus the interest paid on $100,000 of home equity debt (These numbers are cut in half if Married Filing Separately). See IRS Publication 936 for complete details. If you are required to limit your deduction, the IRS provides a worksheet to perform the necessary calculations.
I’ve personally been led to believe that the IRS has been scouring through filed returns looking for interest deductions over a predetermined rate and mailing out exam packets to those whose deduction lies over the threshold amount.
Bottom line is, if your mortgage is over $1 million be prepared to send copies of the following to the IRS:
- Copies of original closing (HUD) documents from the purchase of the home
- Loan agreements, mortgage contracts, promissory notes, etc
- A copy of your annual interest statement for each loan showing the beginning and ending principal balances and the loan’s interest rate
- And, your mortgage interest deduction limitation worksheet.
Like all IRS audits, you are guilty until proven innocent. Make sure to keep any home purchase, home improvement, and mortgage records handy for your entire ownership period plus 7 additional years. See our blog entry entitled “What Records Should I Keep and How Long Should I Keep My Tax Related Documents” for more record retention recommendations. If you are being audited and could use some additional guidance, please feel free to give our office a call.