One of the biggest incentives to owning a home is that the interest you pay on your mortgage is tax-deductible, up to a limit of $1 million.
This deduction, like most other tax breaks for homeowners, applies to any kind of home. That includes a second home, as long as you spend a certain amount of time there: either 14 days each year, or 10 percent as much time as it’s rented. In addition, you can deduct the interest on up to $100,000 of other debt that uses your home as security — for example, a home equity loan. However, the amount you can deduct may be limited if the money you borrow raises your debt above the home’s actual market value. This can sometimes happen when a lender extends you a loan based on more than the value of the house. You can also deduct any amount you pay for points to reduce the interest rate of your mortgage or other loan linked to your home. In most cases, the points on a mortgage to buy or build your principal home can be deducted fully in the first year. However, if you refinance, take a home equity loan, or a loan secured by a second home, the points must be deducted over the life of the new loan. The exception is if you use part of a refinanced mortgage to improve your house; that portion of the points can be deducted in the same year.