6. Is all Home Mortgage Interest deductible?

There are two types of deductible home mortgage interest. One type is called “acquisition indebtedness” which is a mortgage to either purchase the home or substantially improve the home. The mortgage interest on this type of loan is deductible on the first $1,000,000 of indebtedness. The $1,000,000 limit applies to all home mortgages including primary and secondary homes.

The other type of loan on which a taxpayer may deduct mortgage interest is the “home equity loan”. Home equity loans may be used for any purpose, but must be secured by the equity in the home. The deduction is limited to the interest expense on the first $100.000 of indebtedness. Note that these dollar amounts are cut in half if you are married and file a separate return. Note: if you are subject to the alternative minimum tax you lose the benefit of the deduction for interest on home equity loans that aren’t used for home purchase or improvements.

For either of these loan types to qualify for the home mortgage interest deduction, the loan must be secured by a mortgage. It is not enough to say that the loan is secured; all the formalities of creating a mortgage must be followed. This includes filing of the mortgage with the recorder of deeds.

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