I modified my mortgage. Part of the modification added past due interest to my new principle balance. Can I deduct the interest that was capitalized this year?

[PatriciaV]

Please clarify if the interest was reported to you on Form 1098 from the lender.

[rwelle84]

It was not reported as interest paid on a 1098.  

[AliciaP1]

You can only deduct the amount of interest you actually paid to your lender during the year as long as you meet the following conditions:

• The loan is secured, which means the lender has some kind of guarantee of payment, usually in the form of property. If a borrower defaults on payments, the lender can seize the property that’s securing the loan. If you’re buying or refinancing a home, especially if it’s your first home, the loan is usually secured by the home you’re buying or refinancing.
• The home with the secured loan must have sleeping, cooking, and toilet facilities.
• The debt can’t exceed $750,000.
• You or someone on your tax return must have signed or co-signed the loan.
• If you rented out the home, you must have used the home more than 14 days during the tax year or 10% of the number of days you rented it out, whichever is greater.

Most of the time the amount allowed is reported to you in box 1 of the Form 1098 you receive from your lender.

[rwelle84]

I guess my question is could the amount reported to me on the 1098 be wrong and if yes how to correct it.  The interest was paid to the bank as part of the modification/refinance.  I have a new loan with a new principle balance secured by my house signed by me and my wife.

[DianeW777 · Accepted solution]

You may have to add that to the mortgage interest reported on Form 1098.  In essence the loan you are liable for paid the delinquent interest to the bank on the date the loan was approved, and they may not include that with the form.  You should double check with the bank as to how it was handled.  You borrowed the money that paid the interest and now you make payments on the loan.

Be sure you have the loan documentation to prove your payment of the interest.  Interest is deductible only in the year paid, which for you is 2021.

Refinanced home acquisition debt. 

Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.  IRS Publication 936

@rwelle84

[Edited: 01/27/2022 | 8:34a PST]

[rwelle84]

Thank you.  I have documentation of all the interest paid but was concerned about reporting amounts that would not match the 1098.  The new loan closed in 2021 so I am confident the bank received payment for all of the interest I will report.