When you complete Schedule A for your federal tax return, you are able to deduct any home mortgage interest in two categories:
- Loan interest for monies used to significantly improve a primary or secondary residence, which is backed by the property. The loan must not exceed $1,000,000.
- Loan interest that is secured by your home, but doesn’t fall under the other category. This “home equity debt” has an additional $100,000 limit.
A secondary residence is any shelter that has substantial sleeping, toilet, bathing, and kitchen capabilities. This includes homes, cabins, boats, and motor-homes, provided they meet the living facility requirements. In calculated the Alternative Minimum Tax, loan interest on debt used for boats, trailers or motor-homes are not eligible to be deducted.
If you paid points on a loan for the purpose of purchasing, refinancing, or improving a primary or secondary home, you have the option of deducting the spent points. However you have to pro-rate it over the life of the loan. For instance a 30 year refinancing loan initiated in August would be eligible for a 5/360th deduction of the points paid in that year. Your closing statement must clearly state the points paid, either in the form of a loan discount or origination fee, and can’t be excessive. The only exception to this rule is for points paid during the original purchase of a primary home. In these cases, you are able to deduct the full amount of points paid by either you or the seller in the year they were paid.
You are able to deduct unamortized points that you have used over a period of several months, once you pay off or refinance the loan.
Interest on loans that are purposed for investment property, such margin loan interest and investment loans for partnerships and corporate business, are deductible, but are limited by investment income received for the tax year.