Do I include no-interest loans in my average mortage balance for home worth over $2 million?

[pablitosan]

I work for a university in a very expensive area, and the only reason I can afford a house is the stack of loans they provide. One is a conventional mortgage on which I pay interest. The four others are no-interest or deferred interest loans. The total of all the loans is approximately $1.4 million, and the house was bought in Sept. 2017.

However, the one on which I pay interest is $700,000 — and it is the only one that sends me a 1098.

When I am calculating my average mortgage balance to adjust the deductible interest, do I need to add in all the loans that do not send me 1098s, even though they charge no interest? I have studied IRS pub 936 carefully and cannot find any guidance there.

[NCperson]

see the worksheet in publication 936 on page 11 ...... it simply asks for the sum of all the debt on the property.  Even if the interest rate is zero or the interest is deferred, it's still "debt".  Follow the form - pretty easy to do - and the interest that you are able to deduct will be the result 

I assume all the 'debt' you are referencing is secured debt of the home.  Any debt that is unsecured is not part of the calculation as none of the interest would be deductible in any event. 

[DianeC958]

Yes you do need to include the total amount of mortgage debt on your home even though you do not receive 1098 forms. (Look at Page 9 in Publication 936.)

There is a worksheet in the IRS Pub 936 on page 11 to assist you in calculating the amount of mortgage interest you

are allowed to deduct.

Link with information about deducting mortgage interest

[pablitosan]

That sounds right to me - but what about this, from page 4 of Publication 936? "Choice to treat the debt as not secured by your home. You can choose to treat any debt secured by your qualified home as not secured by the home. This treatment begins with the tax year for which you make the choice and continues for all later tax years. You can revoke your choice only with the consent of the IRS. You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest."

Doesn't this mean that I can choose to *treat* the no-interest loans I have as not secured by the home, even though they are? If I do that, how do I signal this choice to the IRS?

[KrisD15 · Accepted solution]

As DianeC958 states, even if you do not receive a 1098, you need to add the mortgage debt to claim the interest,

HOWEVER, As you point out, you have the right to "Exclude" debt to stay under the Limit on Home Mortgage Interest Deduction. 

REMEMBER- This treatment begins with the tax year for which you make the choice and continues for all later tax years.

There is nothing that you need to file, you need paperwork showing your intent (what debt you are excluding and where that debt goes) and save that paper trail if ever audited. You just need to prove that you didn't include the debt, and that you also did not claim the interest on Schedule A. 

I would add that I would research before refinancing the debt you exclude. I would ASSUME that if the loan was ever converted or refinanced, the interest on the new debt instrument would also need to excluded.

ACCORDING TO THE IRS:

"Choice to treat the debt as not secured by your home. You can choose to treat any debt secured by your qualified home as not secured by the home. This treatment begins with the tax year for which you make the choice and continues for all later tax years. You can revoke your choice only with the consent of the IRS. You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest.

@pablitosan