The deduction for home mortgage interest isn't as simple as it seems as a recent Tax Court ruling highlights:  A couple borrowed $1.6M to purchase their home and secured the loan with the home and some securities.  They argued that interest on the amount over $1.1M in mortgage is investment interest since the loan is partially secured by securities.  The Tax Court disagreed because all of the proceeds of the loan were used to purchase the home.  Here are the quick and dirty rules on home mortgage interest deduction:

- Loan proceeds up to $1M must be used to purchase or improve the home; an additional $100,000 can be used with no requirement that it be used for the home.

- Proceeds from home loan refinancing in excess of $100,000 must be used to improve the home, but watch out for Alternative Minimum Tax consequences.

- Loan must be secured by the home.  Interest on loans from retirement plans to buy or improve homes are not deductible because they generally are not secured by the home.

- Only interest on up to $1.1 million of loans is deductible as home mortgage interest.

- The home mortgage interest deduction only applies to the taxpayer's principal residence and one other residence.

Note that there is no mortgage limit on rental property mortgages or loans used for business.

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If you have any questions regarding this issue, please contact the DZH Phillips Tax Department at (415) 781-2500 or email cpas@dzhphillips.com.