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Can you deduct deferred interest added to your loan balance?

The question is whether you can deduct deferred interest that is added to your loan balance by your lender? To be able to deduct interest on your home you must pay the interest and be responsible on the loan for the payment. Further, you can only deduct interest to the extent the principal balance on your loan does not exceed $1 million dollars, plus $100,000 for a second mortgage.

If you incur deferred interest you are not actually paying the interest on the loan. Your lender is adding it to your loan balance. This interest is not deductible on your income tax return. If you receive a Form 1098 from your lender you will see that the box indicating total interest paid for the year does not match the amount of interest including the dererred interest paid for the year. If you deduct the interest amount including the deferred interest your interest deduction will not match the Form 1098 you received from your lender causing a possible audit.

Therefore, make sure you only deduct interest that you actrally pay for during the year.

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