Negative Amortization

Today TaxMama hears from Ray in the Tax Parlor, who tells us. “Two friends and I own some rental homes. One of us says he can deduct not only the total interest paid on one of the properties, but also what he calls the “deferred interest.” In other words, the unpaid interest by which the principal on the first mortgage increased last year. I say he can’t until we sell the property. Are there some good, solid references I can provide him? Thanks.”

Dear Ray,

Wow. You’re right.

I thought I’d be able to quickly point to an obvious place in the IRS publications about mortgage interest – Pub 936 and Pub 530 that explain negative amortization.

There’s nothing there.
There’s nothing immediately findable on the IRS site.
Nor even in their mortgage questionnaire (which happens to be quite nifty).
http://www.irs.gov/individuals/article/0,,id=132143,00.html
(So I brought this to IRS’s attention, thanks to your question.)

Here’s the concept in a Revenue Ruling 80-248, where IRS talks about reverse mortgages. http://www.taxlinks.com/rulings/1980/revrul80-248.htm

In item (2), IRS explains that although interest is deductible when paid or accrued – the accrued only refers to taxpayers who report their income and expenses on an accrual basis. You and your partners are cash-basis taxpayers. So you may not deduct the interest until you actually pay it.

And remember, you’ll find answers to lots of questions about negative amortization and other tax information, free. Where? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips. Please click on the subscribe link and join us.]

To make your comments, please visit TaxMama’s Parlor at TaxTwist.com.

File Download (1:43 min / 0.4 MB)

Leave a Reply