15.1 Home Mortgage Interest
You generally may deduct on Schedule A (Form 1040) qualifying mortgage interest on up to two residences (see two-residence limit, below).
Interest deductions for home acquisition debt and home equity debt may be limited, depending on when you took out the mortgage, the amount of the debt, and how you use the loan proceeds.
$1 million acquisition debt and $100,000 home equity debt limits generally apply.
A loan taken out after October 13, 1987, that is used to buy, construct, or improve a first or second home is called a home acquisition loan, and up to $1 million of such debt qualifies for a mortgage interest deduction, $500,000 if married filing separately (15.2). Loans used for any other purpose are called home equity loans by the tax law, and up to $100,000 of such debt may qualify for an interest deduction; the home equity limit is $50,000 for married persons filing separately (15.3).
Caution
Home acquisition loans are further discussed in 15.2. Home equity loans are discussed in 15.3.
Loan must be secured by residence.
To deduct interest on a home acquisition (15.2) or home equity loan (15.3), the loan must be secured by your main home or a second home. For the loan to be “secured,” it must be recorded or satisfy similar requirements under state law. For example, if a relative gives you a loan to help you purchase a home, the relative must take the legal steps required to record the loan with local authorities; otherwise, you may not deduct interest that you pay on the loan. The IRS, in a private ruling, held that interest paid by a homeowners’ association on a loan to rebuild the common area is not deductible by the individual homeowners where their residences are not pledged as collateral.
Mortgage loan obtained before October 14, 1987.
You may deduct all of the interest on a loan secured by a first or second home if the loan was obtained before October 14, 1987. Technically, such loans are considered home acquisition debt, but they are treated as “grandfathered debt,” exempt from the $1 million loan limit ($500,000 for married persons filing separately).
However, the amount of your pre–October 14, 1987, loan reduces the $1 million (or $500,000) limit on home acquisition debt after October 13, 1987 (15.2). It also reduces the fair market value limit for home equity debt (15.3). If you refinance your loan, see 15.7.
Two-residence limit for qualifying mortgage debt.
The rules for deducting interest on qualifying home acquisition debt or home equity debt apply to loans secured by your principal residence and one other residence. A residence may be a condominium or cooperative unit, houseboat, mobile home, or house trailer that has sleeping, cooking, and toilet facilities. If you own more than two houses, you decide which residence will be considered your second residence. A married couple filing jointly may designate as a second residence a home owned by either spouse. Interest on debt secured by the second residence is deductible under the rules for acquisition debt (15.2) or home equity debt (15.3).
Planning Reminder
If a married couple files separately, each spouse may generally deduct interest on debt secured by one residence. However, both spouses may agree in writing to allow one of them to deduct the interest on a principal residence plus a designated second residence.
A residence that you rent out for any part of the year may be treated as a second residence only if you use it for personal nonrental purposes for more than the greater of 14 days or 10% of the rental days. In counting rental days, include days that the home is held out for rental or listed for resale. In counting days of personal use, use by close relatives generally qualifies as your personal use (9.6).
Interest on debt secured by a residence other than your principal or second home may still be deductible, but only if you use the proceeds for investment or business purposes (15.12).
Interest on mortgage credit certificates.
Under special state and local programs, you may obtain a “mortgage credit certificate” to finance the purchase of a principal residence or to borrow funds for certain home improvements. A tax credit for interest paid on the mortgage may be claimed. The credit is computed on Form 8396 and claimed on Line 53 of Form 1040 (“Other credits”). The credit equals the interest paid multiplied by the certificate rate set by the governmental authority, but the maximum annual credit is $2,000. If you claim the credit, your home mortgage interest deduction is reduced by the amount of the current year credit claimed on Form 8396. If you buy a home using a qualifying mortgage credit certificate and sell that home within nine years, you may have to recapture part of the tax credit on Form 8828.