Mortgage interest is completely deductible for the year in which you pay it, with the following limitations:
- You may deduct interest paid on mortgage loans totaling up to $1 million used to buy, build or improve your principal residence plus a second home. The IRS calls such loans acquisition debt.
- Your home must be used as security for the loan, which might be called a first mortgage (or deed of trust), a second mortgage, home-equity loan or line of credit. Loans used to purchase shares in a cooperative also qualify.
- You may deduct as acquisition debt any interest on a refinanced acquisition mortgage, up to the amount you currently owed on the old loan when you refinanced.