What Interest Is Deductible?

You can deduct on Schedule A interest that qualifies as home mortgage interest. This includes two categories:

• Interest on loans used to buy or improve your primary or second residence, and secured by either of those properties. The total debt cannot exceed one million dollars.
  
• Interest on a loan secured by your primary or second residence that does NOT qualify under the previous heading. This would be considered home equity debt, and such loans cannot exceed an additional $100,000.

A "second home" can include a house, cabin, boat, travel trailer or motor-home, as long as it contains sleeping, toilet and kitchen facilities. Interest on loans that are for boats, trailers or motor-homes are not deductible for purposes of calculating the Alternative Minimum Tax.

You can also deduct "Points" paid on loans used for the purchase, refinancing or improvement of your primary or second home, but pro- rata over the life of the loan. [For example, if you refinanced your 30 loan in August, you can deduct 5/360ths of the Points paid in that year.] The Points paid must be expressed (as a loan origination fee or loan discount) on the closing settlement statement, and must not be excessive for such loans.

There is an exception for Points paid on the original purchase of a primary residence. You can deduct the points paid, by you OR the seller, in full, in the year of purchase.

If you pay off or refinance a loan on which you have been writing off Points over a period of months, you can deduct any unamortized points in full when that loan is paid off.

You can also deduct interest incurred on loans to carry investment property, including margin loan interest and loans to invest in a partnership or corporation business. The deduction is limited to investment income received during the year, and is computed on Form 4952.