Interest allocation rules. The tax treatment of interest ex-pense differs depending on its type. For example, home mort-gage 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 (Form 1040).
In most cases, you allocate interest expense by tracing how the proceeds of the loan are used. See chapter 4 of 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 farm-ing business, see chapter 4 of Pub. 535 to figure the amount to include on lines 21a and 21b.
How to report. If you have a mortgage on real property used in your farming business (other than your main home), enter on line 21a the interest you paid for 2014 to banks or other finan-cial institutions for which you received a Form 1098 (or similar statement). If you did not receive a Form 1098, enter the inter-est on line 21b.
If you paid more mortgage interest than is shown on Form 1098, see chapter 4 of Pub. 535 to find out if you can deduct the additional interest. If you can, include the amount on line 21a. Attach a statement to your return explaining the dif-ference and enter "See attached" in the margin next to line 21a.
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 on line 21b. Attach a statement to your return showing the name and address of the person who received the Form 1098. In the margin next to line 21b, enter "See attached."
Do not deduct interest you prepaid in 2014 for later years; include only the part that applies to 2014.