Allowable Mortgages

• You can deduct mortgage interest for your main home and one secondary home, if your second home qualifies. Qualifying second homes include those that you do not rent out or you rent out, but you use for 14 days or 10 percent of the time it is rented out, whichever is greater. If you have a mortgage on a home you use as a rental property, you should not deduct the interest as mortgage interest. Instead, you deduct it as a rental expense.
  
  

Limits on Interest

• If you took out a mortgage before Oct. 13, 1987, the Internal Revenue Service permits you to deduct all of the interest charged on it. However, any mortgages taken out after that date are subject to a limit of the interest on the first $1 million of mortgage debt. For married couples that file separate returns, each spouse can deduct the interest from up to $500,000 of mortgage debt. For most people, these limits do not come into play.
  
  

Refinancing Considerations

• When you refinance your mortgage, you can deduct the interest charged on the amount you owed before refinancing as mortgage interest. For example, if you have $150,000 remaining on your mortgage when you refinance, if you refinance for $200,000, only the interest on the first $150,000 would be deductible. The only way to include the extra as mortgage debt would be to use it to improve your home, such as remodeling the kitchen or adding on a garage. If you do so, then that money would be considered mortgage debt.
  
  

Functionality

• When you have a mortgage, your lender sends you a Form 1098 that shows the amount of interest you paid. When you file your taxes, you have to use Form 1040 because you need to itemize your deductions on Schedule A. On Schedule A, your mortgage interest gets reported on Line 10. If your mortgage exceeds the limits, you have to use Table 1 in IRS Publication 936 to figure the amount of interest you can deduct.