If you're paying a mortgage, listen up because you can deduct some of your paid interest.
“Qualified residence interest,” also known as mortgage interest, paid on your primary residence and one secondary residence can be deducted on Schedule A, subject to certain limitations.
You can only deduct interest on two properties at a time. If you own a personal residence in New Jersey and two separate person-use vacation properties, one in Florida and one in the Poconos, and all three properties have a mortgage, you can only deduct the mortgage interest on two of the properties
There are two kinds of deductible qualified residence interest:
- Acquisition debt is debt acquired after Oct. 13, 1987, to buy, build or substantially improve your main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life or adapts the home to new uses.
- Home equity debt is debt secured by a principal residence or second home that is not used to buy, build or substantially improve the property. There is no restriction or limitation on what the money can be used for — you can use it to buy a car or pay off credit cards.
The amount of principal on which interest can be deducted is limited. Acquisition debt is limited to $1 million ($500,000 if Married Filing Separately). Acquisition debt cannot exceed the cost of the home plus the cost of any substantial improvements. Home equity debt is limited to $100,000 ($50,000 if married filing separately).