Since 1987 mortgage interest deduction has acquired certain limitation on the types and amounts of loans. You can generally deduct interest you pay on the first $100,000 of a home equity loan. After that, it depends. If the home equity loan was used to improve your first or second home – or to purchase a second home – you can probably take the deduction on an amount up to $1 million or the value of the home.
However, if you took out a mortgage on or before October 13, 1987, all of the interest is fully deductible, regardless of the amount of the loan. This is called “grandfathered debt.”
If you had such a mortgage and you refinanced it after that date, the new mortgage is treated as grandfathered debt to the extent of the principal balance remaining on the pre-October 13, 1987 loan. Any mortgage amount over that limit may be eligible for treatment under category (A) or (B) discussed below.
If you had established a home equity line-of-credit as of October 13, 1987 and you borrowed amounts against it after that date, then those amounts are treated under category (A) or (B), below, depending on how the proceeds were used. Amounts borrowed before that date are fully deductible grandfathered debt.
- Post-1987 loans — for loans that are not considered grandfathered debt, additional limits apply.
- Mixed-use loans — an allocation must be made if the loan was used for purposes other than buying, building, or improving your home.
