A couple got behind on their mortgage. They refinanced in 2010, borrowing an additional $45,000 to pay the past due on their mortgage. The mortgage company issued a 1098 for that year saying it had received less than $10,000 in interest, but the couple claimed that they had paid $48,000 in mortgage interest. The IRS noticed the difference between the 1098 and the 1040, and told the couple they could not deduct the amounts borrowed to pay interest for year prior to 2010. The couple went to court against the IRS, and lost. The US Tax Court in a memo decision said that they could only deduct the interest for the year it was payable and actually paid, not for the prior years. The Court said that cash basis taxpayers like the couple in this case get to deduct interest only when they actually pay it. Borrowing money, even if the loan proceeds are applied to pay past due interest, isn’t paying the interest because the new loan hasn’t been paid yet. Charles Copeland v. Commissioner, T.C. Memo 2014-226 (October 30, 2014).
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