In a new ruling, the IRS allows you to treat excess “acquisition debt” as “home equity debt” when claiming mortgage interest deductions. (IRS Revenue Ruling 2010-25)
The skinny: The tax law allows you to deduct interest paid on up to $1 million of acquisition debt used to buy, build or improve a home. Also, you can deduct interest paid on up to $100,000 of home equity debt, regardless of the purpose.
Now the IRS says up to $100,000 of first mortgage debt in excess of the $1 million limit can qualify as home equity debt. In other words, you can treat the first $1 million of a big first mortgage loan as acquisition debt, and you treat the next $100,000 as home equity debt even though there’s only one loan. That way, you can deduct the interest on the entire $1.1 million.
Tip: The ruling contradicts two previous Tax Court decisions.