The mortgage interest deduction is one of the most valuable tax deductions available to American taxpayers. According to the Joint Committee on Taxation, it's projected to reduce tax liabilities by $379 billion over the five-year period from 2013 to 2017. Unfortunately, the write-off is usually a use-it-or-lose-it proposition on your main house's mortgage. In some specialized situations, though, you can carry it or its benefits forward.
Home Office Interest
If you have a home office for a small business or you work as a consultant from your home, you're entitled to write off your home office expenses, including a proportionate share of your mortgage interest on your Schedule C as a part of your business deductions. Normally, your mortgage interest and other home office expenses offset your business's income to reduce your taxable profit. However, if your interest or other expenses push your business into a loss, you can save that loss and carry it forward for up to 20 years. Alternately, you can also carry it back to offset profits from either last year or the year before that.
If you have a loss on an investment property on which you pay mortgage interest, you can also carry it forward if you can't use it in the year that you incur the loss. The IRS first wants you to use your loss against any other rental properties, so if you lose $2,000 on one property and make $3,000 on another, you'll end up with only $1,000 in taxable profit. If you don't have other gains to offset, you can write off up to $25,000 in losses per year as long as your adjusted gross income is under $100,000, with the write-off going down by $1 for every $2 in AGI over the threshold. If you still have losses left, you're allowed to carry them forward until you can use them either to offset rental property income or earned income when your AGI is lower.
Certain refinance points can be carried forward and written off over the entire life of the loan, a little piece every year. To qualify for amortization, the points need to be discount points that you pay to buy down the loan's rate. You'll also need to pay them in cash. If the loan's settlement statement doesn't show that you brought a check to the closing for at least the amount of the points, they aren't deductible at all. You can even write off the entire unused balance if you pay the loan off early.
If your mortgage interest makes your deductions so high that you can't claim all of them, you can't carry it forward. However, what you can do is delay taking other deductions so that you can get the full benefit of your mortgage interest. One way to do this is to delay making charitable contributions until the next year. You also could pay your property taxes late, as long as the penalties won't cost more than your tax savings, and you won't be putting your house at risk. A tax adviser may be able to help you devise other strategies as well.
- Center on Budget and Policy Priorities: Mortgage Interest Deduction Is Ripe for Reform
- IRS: Publication 936 -- Home Mortgage Interest Deduction
- IRS: Publication 536 -- Net Operating Losses (NOLs) for Individuals, Estates and Trusts
- Bankrate: An Exception to Passive Activity Loss Rules
- IRS: Schedule A (Form 1040)
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.