Inaya Mclaughlin
Entering an expense for a mortgage can be a complicated process, especially when it comes to tax deductions and other financial considerations. Whether you're a homeowner, landlord, or self-employed, understanding the rules and regulations surrounding mortgage expenses is essential for effective financial management. In this discussion, we will delve into the intricacies of recording and claiming mortgage-related costs, exploring various scenarios and providing practical guidance on navigating this complex topic. By the end, you should have a clearer understanding of how to enter and manage expenses related to your mortgage effectively.
| Characteristics | Values |
|---|---|
| Who can enter an expense for a mortgage? | Self-employed people who work from home can enter an expense for a mortgage. |
| What can be included in the expense? | Mortgage interest, property taxes, and property insurance. |
| What cannot be included in the expense? | Principal portion of a mortgage payment, as it is not considered an expense. |
| How to enter an expense for a mortgage? | Use accounting software like QuickBooks or Stessa to create an expense account for interest payments. |
| How much can be deducted? | If the house was bought before Dec 16, 2017, the interest paid on the first $1 million of the mortgage ($500,000 if married filing separately) can be deducted. |
| Additional considerations | Keep records of income and expenses, as well as documentary evidence such as receipts, canceled checks, and bills with proof of payment. |
What You'll Learn
Calculating mortgage interest
To calculate mortgage interest, you need to know the principal amount, the interest rate, and the loan term. The principal is the amount of money borrowed from the lender, i.e. the price of the home minus the down payment. The interest rate is the percentage of the loan charged as a cost of borrowing, expressed as an annual percentage. The loan term is the amount of time over which the loan must be repaid in full, typically 15, 20, or 30 years.
With these three pieces of information, you can calculate the interest on a simple interest loan using the formula: SI = P * R * T, where SI is the simple interest, P is the principal, R is the interest rate, and T is the loan term. For example, if you borrow $300,000 at a 4% interest rate for 15 years, your interest payment would be $300,000 * 0.04 * 15 = $180,000.
However, most mortgages are amortized loans, which means that you pay more interest at the start of the loan. With amortization, your monthly payment remains the same, but over time, less of your payment goes toward interest and more toward the principal. At the beginning of an amortized loan, a larger portion of your early payments covers interest, with less going toward the principal. So, for example, if your monthly payment is $1,432.25, at the beginning of the loan, $1,000 of that might go towards interest costs, with $432.25 paying down the loan balance.
There are mortgage calculators available online that can help you estimate your monthly mortgage payment and understand what it includes. These calculators can also help you decide whether to spend less on the home, choose a longer loan, shop for a lower interest rate, or make a bigger down payment.
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Self-employed and working from home
If you're self-employed and working from home, you may be able to deduct certain expenses for the part of your home that you use for business. This is known as the 'home office allowance' or 'home office deduction'. It's important to note that you can't deduct expenses for parts of your home not used for business, nor can you deduct expenses for any part of your home that you use for both personal and business purposes.
There are two methods to determine the value of your home office deduction: the simplified method and the actual expenses method. The simplified method multiplies the square footage of your office space by a prescribed rate, which is $5 per square foot for up to 300 square feet of space. The actual expenses method, which is more complicated, values your home office by measuring actual expenditures against your overall residence expenses.
If you choose the actual expenses method, you can deduct direct expenses in full, such as painting or repairs solely in the home office. Indirect expenses, such as mortgage interest, insurance, home utilities, real estate taxes, and general home repairs, are deductible based on the percentage of your home used for business.
To calculate the percentage of your home used for business, you can use the following formula: (hours worked in a month / total hours in a month) x 100. For example, if you work 8 hours per day, 5 days per week, that's approximately 176 hours per month, which equates to 24.4% of your monthly mortgage interest that you can claim.
It's important to note that you can't expense your entire mortgage repayment, only the interest portion. Additionally, you must ensure that your business has legal liability for the mortgage and that you can provide the necessary documentation during an audit.
While claiming expenses can help lower your taxable income, it may also impact your ability to obtain a mortgage. Mortgage lenders tend to favour W-2 employees and may consider your lower income after deductions when evaluating your mortgage application. Therefore, it is essential to carefully weigh the benefits and risks of claiming expenses if you plan to apply for a mortgage.
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Rental property owners
As a rental property owner, you can deduct various expenses related to buying, operating, and maintaining the property. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.
It's important to note that only the interest portion of your mortgage payment is deductible, not the entire payment. This includes any late fees, prepayment penalties, and mortgage points. You can also deduct the cost of insurance, maintenance, and advertising. These deductions can help offset rental income and lower your tax burden.
To claim these deductions, you must have documentary evidence, such as receipts, cancelled cheques, or bills. It is also recommended to maintain digital records of receiving rent, paying property expenses, and making mortgage payments. This will help you keep track of your expenses and prepare your tax returns accurately.
Additionally, if you rent out a separate unit in an owner-occupied home, such as a basement apartment, you can deduct a fraction of your mortgage interest proportional to the rented portion of the home. For example, if the rented area makes up a quarter of the total square footage, you can deduct a quarter of your mortgage interest.
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Tax deductions
If you're looking to deduct your mortgage-related expenses, there are a few things to keep in mind. Firstly, you can only deduct expenses if you itemize your deductions. This means that you'll need to use Schedule A of Form 1040 when filing your taxes, which can be more time-consuming than taking the standard deduction. However, if your itemized deductions, including your mortgage interest deduction, are higher than your standard deduction, it's worth the extra effort.
One of the most common mortgage-related tax deductions is the mortgage interest deduction. This allows you to deduct the interest you paid on your mortgage loan during the tax year. The deduction is limited to the first $750,000 of the loan ($375,000 if married filing separately). If you bought your house before December 16, 2017, you can deduct the interest on the first $1 million of the mortgage. To claim this deduction, you'll need to list it on Schedule A of Form 1040 and provide basic income information, including the amounts of your income and any estimated totals of the amounts paid for mortgage interest.
If you're self-employed and work from home, you may also be able to claim a home office allowance. This is a flat-rate expense that you can claim against your business expenses, including a percentage of your mortgage interest. The amount you can claim depends on the number of hours you work from home each month. Additionally, if you're renting out part of your home, you may be able to deduct mortgage interest as a rental expense, but it typically doesn't qualify as an itemized deduction.
It's important to note that the rules for tax deductions can be complex, especially if your situation is unique. For example, if you and someone who is not your spouse are liable for mortgage interest, or if your home was destroyed or under construction during the year. In these cases, it's recommended to consult a qualified tax professional or refer to IRS Publication 936 for detailed information.
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Using QuickBooks
To enter an expense for a mortgage using QuickBooks, you need to first set up a liability account. This involves creating a journal entry to record the initial mortgage loan. You can do this by going to the "+" or "New" button and selecting "Journal Entry". Here, you will need to input the relevant account and loan information, such as the loan amount, remaining balance, and loan origination date. You can find this information by contacting your bank or lender, or by referring to your previous records if available.
Once the liability account is set up, you can record the mortgage loan and enter the monthly mortgage payments. To automate this process, you can set up a recurring expense under "Gear > Recurring Transactions". When making the monthly payments, the transaction needs to be split into three lines: the principal payment, the interest payment, and the escrow payment. The principal payment is applied to the Long-Term Liability Mortgage to pay down the loan, the interest payment is booked under an Interest Expense account, and the escrow payment is applied to an Other Current Asset account.
To record the monthly mortgage payments, you can use the "Write Checks" feature in the Banking menu or go to "+" > "Journal Entry" to create a journal entry. If you are using the "Write Checks" feature, select the liability account for the loan from the Category dropdown and enter the payment amount. Then, on the second line, select the expense account for the interest and enter the interest amount. Any additional fees or charges can be entered on separate lines.
By diligently recording your mortgage expenses in QuickBooks, you can save time and effort for yourself and your CPA when it comes to bookkeeping and reconciliation at the end of the year.
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Frequently asked questions
If you are using QuickBooks Online, go to the Gear icon, then Chart of Accounts. Select the New button. Choose Expense as the Account Type, then Interest Paid as the Detail Type. Enter the account name (e.g., Mortgage Interest) and click Save.
Contact your bank or lender for the necessary information. You can also cross-check the amounts from your previous company file if you have one.
You won't be able to expense your mortgage because you're already entitled to the simplified allowance. This is a flat rate expense of £312 that you can claim against your business expenses.
While the principal portion of a mortgage payment is not an expense, the remaining items, including mortgage interest, property taxes, and insurance, can typically be deducted against the income received from the properties.
You can claim the mortgage interest deduction on Schedule A of Form 1040, which means you'll need to itemize instead of taking the standard deduction.
