If you rent out part of your home to a tenant, an allocable portion of your interest expense may be a deductible expense for producing rental income. This would be reported on Schedule E, Supplemental Income and Loss. If you have a home office or use part of your home in your business, part of the mortgage interest can be claimed as a deduction related to the business use of your home on Schedule C, Profit or Loss from Business. Provided your home still qualifies, the rest of the mortgage interest would be deductible as an itemized deduction on Schedule A.
Mortgages that Qualify
Whether or not you can deduct all your home mortgage interest depends on the date you took out the mortgage, the amount of the mortgage, and how you used the proceeds of the loan. There are three categories for determining whether your home mortgage interest is fully deductible. If your mortgages fit into one of these categories during the whole year, your interest is fully deductible.
You took out your mortgage on or before October 13, 1987. (This is referred to as “grandfathered debt”.)
Mortgages taken out after October 13, 1987 were used to buy, build, or improve your home, but only if the total of all your mortgages, including those taken out before October 13, 1987 is $1,000,000 or less ($500,000 if married filing separately) at all times during the year.
You took out any mortgages after October 13, 1987 and used the proceeds for purposes other than to buy, build, or improve your home, provided the total of these mortgages was $100,000 or less ($50,000 if married filing separately), and when combined with the mortgages in categories 1 and 2, do not exceed the fair market value of your home. An example of this type of mortgage is a home equity loan used to pay off credit card bills, buy a car, or pay tuition.