Mortgage Interest Deduction
The Internal Revenue Service allows most taxpayers to deduct all of their mortgage interest if they file itemized deductions on form 1040. For all mortgages finalized before Oct. 13, 1987, interest is fully deductible on mortgages less than $1million. Also, a second mortgage of $50,000 or less -- $100,000, if you're married and filing jointly -- to improve your home also qualifies. If your mortgage totals exceed those amounts, you may still deduct interest but only for the portion of the loan that falls below the maximum.
Your primary residence, the home in which you live most of the year, qualifies for the deduction. A second home that you live in at least part of the year also qualifies for a deduction if you use it 14 days more than it's rented each year, or reside in it 10 percent more days than it's rented, if it's only occasionally rented. You may claim the interest as a deduction, although you still need to treat the home as a rental in regard to income it generates. Interest on third houses and investment properties don't qualify for the deduction.
Home Equity Credit
In some cases, the interest on a home equity line of credit also qualifies for the mortgage interest deduction. You may only claim the interest on the total of the secured portion of the loan, which is your amount of equity in the home's value. If you take out a $30,000 HELOC and have $22,000 in equity in your home, you may only claim the interest on the $22,000 as a deduction.
Weighing the Standard Dedcution
Since you'll only be able to make use of the mortgage interest deduction if you itemize your deductions rather than taking the standard deduction, you'll need to determine which is more beneficial. For married couples in 2010, the standard deduction is $11,400 and for individuals it's $5,700. For the mortgage interest deduction to be advantageous, you'll need to claim total deductions -- including charitable giving, medical costs and business and educational expenses -- that exceed the allowable standard deduction. If the combination of your mortgage and other deductions are equal to or less than the standard deduction, you are better off not itemizing.