Interest Allocation Rules
The tax treatment of interest expense differs depending on its type. For example, home mortgage interest and investment interest are treated differently. "Interest allocation" rules require you to allocate (classify) your interest expense so it is deducted (or capitalized) on the correct line of your return and receives the right tax treatment. These rules could affect how much interest you are allowed to deduct on Schedule F.
In most cases, you allocate interest expense by tracing how the proceeds of the loan are used. See Pub. 535 for details.
If you paid interest on a debt secured by your main home and any of the proceeds from that debt were used in your farming business, see Pub. 535 to figure the amount to include here.
How To Report
If you have a mortgage on real property used in your farming business (other than your main home), enter the interest you paid to banks or other financial institutions for which you received a Form 1098 (or similar statement). If you did not receive a Form 1098, enter the interest in Farm Expenses - Other Interest section.
If you paid more mortgage interest than is shown on Form 1098, see Pub. 535 to find out if you can deduct the additional interest. If you can, include the amount. Attach a statement to your return explaining the difference and enter "See attached" in the margin.
If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on the mortgage and the other person received the Form 1098, include your share of the interest in Farm Expenses - Other Interest section. Attach a statement to your return showing the name and address of the person who received the Form 1098. In the margin, enter "See attached."
Do not deduct interest you prepaid for later years; include only the part that applies to the tax year.