What are the tax implications of paying back mortgage assistance?

[pjs]

We received mortgage assistance in 2015 and sold our house with profit in 2018 - this means we needed to pay back the mortgage assistance received in 2015. When mortgage assistance program was paying our property taxes and mortgage interest in 2015 we could, naturally, not deduct those in our taxation. Now that we paid back the mortgage assistance we, in practice, also paid back the property taxes and mortgage interest for 2015. Can we refile the 2015 taxation to get benefit for these property tax / interest deductions and what forms are needed for that / how do we do that?

[PhyllisG · Accepted solution]

As you are aware, the payments that you received under a mortgage assistance program were not a reportable or taxable event.    

Property taxes, mortgage interest, escrow fees, etc. are normally reported on the Form 1098. If you do not have a Form 1098, the Form 1098-MA you may have received includes the same information. 

However, home deductions are only deductible in the year that they are paid and not incurred.  Therefore, if the loan was full paid by you after 2015 (you indicated that it included property tax and the mortgage interest) then you cannot file a 2015 Form 1040X to claim the deductions.

[pjs]

Thank you for the reply. In that case, can we deduct the interest and property taxes paid as part of paid back mortgage assistance in 2018 taxation? We sold the house in 2018 and mortgage assistance was paid back at closing.

[PhyllisG]

You must first consider if you had a legal obligation to pay the mortgage and interest before you can take a deduction per the Internal Revenue Service. Next, because of tax reform, if the mortgage assistance included a home equity line of credit then you cannot take home deductions related to that portion of the loan. However, if the home equity line of credit was strictly used for home improvements and not to pay off other debts (e.g. credit cards) then you can deduct the interest that was paid.

You will have to determine the actual amount of the interest and property taxes that you had  paid.  You should review the most recent Form 1098-MA that you may have received or any other document (e.g. HUD-1 Closing Disclosure) that reflects the amounts. Please note, the Form 1098-MA is an informational statement provided only for record-keeping purposes and cannot be entered into TurboTax. The TurboTax program will walk you through the input of the applicable information.

You must also be able to itemized deductions.  If you are not able to itemize on the Form 1040 Schedule A, then you will not be able to claim any home deductions in 2018.  Furthermore, because of the Tax Cuts and Jobs Act, the standard deductions have increased.  For instance if you are filing a Married Filing Jointly return, then your standard deduction for the 2018 tax year is $24,000.  This means that your itemized deductions should exceed the standard deduction in order for it to be beneficial to itemize.

For additional information regarding the Form 1040 Schedule A deductions, please visit the irs.gov website and input a Instructions for Schedule A (Form 1040) (HTML) search.