A qualified residence is defined as a house, cooperative apartment, condominium, house trailer, or a boat, provided it includes the basic living accommodations, including sleeping space, toilet and cooking facilities. A qualified residence includes a taxpayer's principal residence or second home. The taxpayer's second residence may be unoccupied, partially occupied, or rented to another party. If the second residence is rented, it will be subject to the personal use requirements relating to vacation homes. If the taxpayer did not rent the residence at any time during the year, it will be considered a qualified residence.
Mortgage interest is subject to certain limitations to be fully deductible.
Acquisition Indebtedness Sec. Indebtedness incurred after the acquisition or improvement of such property, if such indebtedness would not have been incurred but for such acquisition or improvement and incurring such indebtedness was reasonably foreseeable at the time of acquisition or improvement. Debt can qualify as being incurred to acquire, construct, or substantially improve a residence under the tracing rules of Reg. The determination of whether debt is incurred in acquiring, constructing, or substantially improving a residence will be made independently of the determination of whether the debt is secured by the residence and without regard to whether the residence is a qualified residence at the time the expenditures are made or the debt is incurred. Therefore, a debt that is not initially secured in acquiring a qualified residence may become acquisition indebtedness at the time the debt is subsequently secured by the qualified residence.