Mortgage Interest Deduction Question

[SoonerMagic1]

I have searched the internet but cannot seem to find a definitive answer to this question.

If you close in late November or December of 2013 and you make your first mortgage payment after Jan 1, 2014, can you deduct on your 2014 taxes the mortgage interest that accrued in 2013 but was not paid until 2014?  I would not want it to be a deduction for the 2013 tax year because it likely would not be enough to exceed the standard deduction.

Thanks.

[StartingOver10]

Yes, you can deduct the interest paid on your tax return. Also, you can deduct real estate taxes and points charged when you originated the loan. You will find these amounts on your HUD1.

However, as you pointed out, you deduct the interest amount in the year paid. So if you close Nov X 2013  and your first payment is not due until Jan 1 2014, then you can deduct December interest (not Nov) in your 2014 tax filing if you are making the payment in 2014. You can't deduct Nov 2013 interest on your 2014 tax filing because it was paid at the time of closing in Nov 2013 in the form of pre-paid interest.

[SoonerMagic1]

That makes sense.  Thank you so much.

One point of clarification - So if you close in December you would typically not have to pre-pay interest at closing?

[tooleman694]

I wish I could deduct mine, with rates so low I dont pay enough interest in 12 months to write off any of the interest.

[StartingOver10]

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@SoonerMagic1 wrote:

That makes sense.  Thank you so much.

One point of clarification - So if you close in December you would typically not have to pre-pay interest at closing?

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The interest you are pre-paying is a very small amount. It is the per diem interest from the date of closing to the end of the month. You will see it referenced on your GFE when ever you apply for your mortgage. It is also mentioned on the closing costs worksheet. No matter when you close you will have some pre-paid interest.

For example: if you close Dec 10th, you are going to pre-pay your interest from Dec 10th through Dec 31st at the closing.

Your first payment will be due Feb 1st. What you are paying when you make your mortgage payment on the first of each month is the previous months interest plus a little principal on a normal loan.

[SoonerMagic1]

Ok, thanks.  Just one more question ... is it possible to time your closing where your first payment is due Jan 1 which would include interest from the previous year and thus minimize paying any pre-paid interest in the previous year?

[coterotie]

One other bit of clarification, if you write the check and mail it before 12/31 you can count it for 2013.  However it will not match the documents you recieve (1099) so you will have to retain the documentation should Uncle Sugar ask you questions.

[SoonerMagic1]

Thanks coterotie, but I'm trying to minimize any deduction for 2013 and maximize it for 2014.  That is because the 2013 amount will not be sufficient to justify itemizing.

[SoonerMagic1]

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@tooleman694 wrote:

I wish I could deduct mine, with rates so low I dont pay enough interest in 12 months to write off any of the interest.

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That is a good problem to have!

[StartingOver10]

To answer this question: " is it possible to time your closing where your first payment is due Jan 1 which would include interest from the previous year and thus minimize paying any pre-paid interest in the previous year?"

I suppose the answer to this would be to close Nov 29th 2013. You would be paying Nov 29th and Nov 30th pre-paid interest at closing. Nov 20th is a Saturday so no closings happen over the weekends. I am assuming you are in a table funding state and not an escrow closing state where it would be a slightly more difficult to time.

From a practical  POV I don't think Nov 29th will work because Thanksgiving is Nov 28th and all the attorney's and title co's and banks are closed for the Holiday plus the weekend.

You might be able to close Nov 27th, but you probably will run into Holiday time then too as many of the above take the day before Thanksgiving off.

You are probably safe with Nov 26th as a closing date. Your per diem interest will be for Nov 26 through Nov 30th. Then your first payment will be due Jan 1 2014.