How to Deduct Interest Paid on a Land Contract
Experts at Bankrate.com, a leading online financial advising site, say the largest loophole in the individual federal tax code is the home mortgage interest deduction. Homeowners in the United States are entitled to this tax benefit, which can significantly reduce your tax liability, leading, potentially, to a larger refund. This is also true for land contracts. If you are paying on a land contract, you can claim this interest deduction on your taxes.
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Instructions
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1
Make sure the debt is secured. This means that the loan is a mortgage, or a repayment debt guaranteed by a piece of real property. Most home interest deductions are taken on houses, but the IRS says that a land contract qualifies as a secured debt and is tax deductible.
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2
Contact your mortgage company if you do not receive your 1098 interest statement by the second week of February each year. These interest documents must be sent out by Jan. 31. It will arrive by mail, but after Jan. 31 can be resent by mail, fax or email.
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3
Begin preparing your 1040 tax return. Report all income, profit or loss from a business, deductions and tax credits. You need Schedule A to report your land interest deduction.
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4
Add together all mortgage interest paid in the previous year if you have multiple 1098 interest statements. This will apply only if you have more than one mortgage. Remember that second mortgages and equity loans generally apply, too. Calculate total interest paid.
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5
Find out if you paid any mortgage discount points in the previous year. If you financed any eligible mortgage costs (origination fees, discount points), you can only deduct the amount paid in the previous year, not the entire sum of these costs. Contact your lender for a breakdown of mortgage costs paid in each tax year. Add these costs to the total mortgage interest.
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Enter the amount calculated from Steps 4 and 5 on Line 10 on your Schedule A. Complete the rest of your tax return and file with the IRS.
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Tips & Warnings
It's best to speak with an accountant especially if you are unsure of the amount paid in home mortgage expenses. An accountant can double-check your figures and, most importantly, help to avoid an audit.
References
Resources
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