This is the first in a four-part series about home mortgage interest. One would think that deducting home mortgage interest on your taxes would be a simple, straightforward process. And for most taxpayers, it is. You get your 1098, enter the amount of interest shown on the form, and proceed to the next item. For others, the situation may not be quite so simple.

The IRS has four classes of home mortgage debt. Grandfathered debt is a mortgage originated on or before October 13, 1987. Since most mortgages do not exceed 30 years, there are very few of these remaining. The distinguishing characteristic of these mortgages is that all of the interest is deductible, without regard to how the proceeds were used.

Acquisition debt is a mortgage in which the proceeds were used to buy, build, or substantially improve a main or second home. Interest is deductible on up to $1,000,000 ($500,000 married filing separately) of acquisition debt. For unmarried taxpayers, the limit is per taxpayer. This is an unfair aspect to our tax law, as a married couple is limited to $1,000,000 of debt, but an unmarried couple living together is allowed $2,000,000. A married couple is considered one taxpayer. In a recent court case the IRS was challenged on its application on a per taxpayer basis and lost the case. The IRS has announced acquiesce to the ruling, so it will be applicable until changed.

Home equity debt is a loan in which the proceeds are used for purposes other than buying, building, or improving a main or second home. The limit on home equity debt is $100,000. If a taxpayer has more than $1,000,000 in acquisition debt, the excess may be treated as home equity debt.

Refinanced debt is the final category. It is debt incurred to refinance home acquisition debt and is treated as such up to the balance of the old mortgage. Amounts above that may be treated as home equity debt.

Regardless of the type of home mortgage debt, there are other requirements.

First, the debt must be secured debt, meaning that the home has been given as collateral for the debt and a lien filed.

Second, it must be a qualified home. A qualified home is your main home, the place where you usually live. A second home that is not rented out can be a qualified home. You cannot deduct interest on more than two qualified homes. The definition of a home is quite broad, and can include a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Houses you own but rent out to others are not qualified homes, but the interest may be deducted on Schedule E.

Third, you must have the legal liability to make the mortgage payments. If your name is not on the mortgage, you generally cannot deduct the interest. However, there are two exceptions. If the taxpayer is a co-owner on the title, he/she may deduct the interest. The second exception is normally applied on a facts and circumstances basis. If you live in the house and make the payments under an agreement with the owner, some courts have held that you may deduct the interest.

Fourth, you must actually make the payments from your own funds. For example, you live in your mother’s home but are not on the title or mortgage. You make the payments. You cannot deduct the interest, as you are not legally liable. Your mother cannot take the deduction because she did not make the payments.

Finally, if you do not itemize deductions, you cannot deduct home mortgage interest. Interest not deducted in one year cannot be deducted in a future year.