Pub 17 and 936

Home Mortgage Interest

Generally, home mortgage interest is any interest you pay on a loan secured by
   your home (main home or a second home). The loan may be a mortgage to buy
   your home, a second mortgage, a line of credit, or a home equity loan. 

You can deduct home mortgage interest only if you meet all the following tests. 

        You must file Form 1040 and itemize deductions on Schedule A. (See How
        To Report, later, for details about reporting home mortgage interest on
        Schedule A.) 
        You must be legally liable for the loan. You cannot deduct payments you
        make for someone else if you are not legally liable to make them. Both you
        and the lender must intend that the loan be repaid. In addition, there must be
        a true debtor-creditor relationship between you and the lender. 
        The mortgage must be a secured debt on a qualified home. (See the
        explanations of "secured debt" and "qualified home" on this page.) 

   Fully deductible interest. In most cases, you will be able to deduct all of your
   home mortgage interest. Whether it is all deductible depends on the date you took
   out the mortgage, the amount of the mortgage, and your use of its proceeds. If all
   of your mortgages fit into one or more of the following three categories at all times
   during the year, you can deduct all of the interest on those mortgages. If any one
   mortgage fits into more than one category, add the debt that fits in each category to
   your other debt in the same category. If one or more of your mortgages does not fit
   into any of these categories, use Part II of this publication to figure the amount of
   interest you can deduct. 

   The three categories are: 

      1.Mortgages you took out on or before October 13, 1987 (called
        grandfathered debt). 
      2.Mortgages you took out after October 13, 1987, to buy, build, or improve
        your home (called home acquisition debt), but only if these mortgages plus
        any grandfathered debt totaled $1 million or less ($500,000 or less if
        married filing separately) throughout 1997. 
      3.Mortgages you took out after October 13, 1987, other than to buy, build, or
        improve your home (called home equity debt), but only if throughout 1997
        these mortgages totaled $100,000 or less ($50,000 or less if married filing
        separately) and all mortgages on the home totaled no more than its fair
        market value. 

   The dollar limits for the second and third categories apply to the combined
   mortgages on your main home and second home.