1098 for vacant lot loan expected to start construction in the next year

[RaheSea]

I purchased a vacant lot in 2021 using a " mortgage" loan from our Credit Union. The mortgage  was paid off later last year.  The process for initiating the construction of a home will start later this year.  I have received a Form 1098 ( no suffixes ) from the Credit Union with: Box 1: the interest paid last year, Box 2: Outstanding Balance ( Incorrect since the Loan has been paid ), and Box 3: Mortgage Origination Date.

Can this be used as a deduction on my taxes for 2021?  If so,  where do I enter this information into Turbo Tax?  Typically we do NOT itemize deductions but allow Turbo Tax to decide if we should take the Standard Deduction or go with iemized deductions.

[JohnB5677 · Accepted solution]

No, You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it's ready for occupancy. The 24-month period can start any time on or after the day construction begins. As a qualified home, the interest paid may qualify as deductible mortgage interest, with certain limitations.

You can't deduct interest on land that you keep and intend to build a home on. However, some interest may be deductible once construction begins.

IRS - Mortgage on land

[jeeplady0201]

I have a similar situation. We purchased the lot in 2021 and paid cash.  We have a construction loan to build the house but no draw was made in 2021, therefore the balance was $0 at the end of 2021.  The bank sent a 1098 with the Origination Fee amount listed as Interest Paid (Box 1) and the Mortgage Origination Date as the date of closing on the lot. Turbo Tax keeps giving me an error as it wants the balance of the mortgage and will not accept $0.  Should I just delete the loan info? I asked the bank and their response was Box 1 was the only place they could figure out to put the amount. I would appreciate any help with this issue.

[PattiF]

Yes, you should just delete the loan info since construction has not begun and it is not deductible until construction has started.

The total loan origination fees on a purchase of a new home are deductible in the year of the purchase or deducted over the life of the loan. 

You can't deduct all of the loan origination fees paid in 2021, on the 2022 return, unless you spread them over the life of the mortgage.

For example, let's say the total loan Origination fees were, $2,500.  Then $100 is deducted each year on a 25-year mortgage ($2,500/25 years = $100)

@jeeplady0201 

[jeeplady0201]

Thanks for the response. I have one additional question. The construction loan is construction to perm, however, we currently have a house which we will be putting on the market and hopefully sell by the time the new house is completed. The proceeds from the current house will be used to pay off the construction to perm loan if the market stays as is. Therefore, we would not have a mortgage over the 25 years, as in your example. So, if we payoff the loan in 2022, can we take the Origination Fee full amount in 2022 taxes since that would be the life of the loan?

[DMarkM1]

Yes you will claim an itemized deduction for any remaining points in the year you pay off the loan. 

In the "Mortgage Interest" topic when you enter the form 1098 for 2022, you will be asked about the points paid in 2022. 

You will select that you paid points on your second home or opened a home equity loan in 2022. 

On the follow on page you will enter the loan information and the points paid (all remaining) and check the box for "Refinanced/paid off the loan".