An election of a reversion of debt security should be made if full deductions are possible on debt interest regardless of residence mortgage interest qualifications. Refinancing of mortgages at a value not greater than an existing mortgage's balance allows for continued availability of full deductions. Examples of secured debt and mortgage refinancing are included. With the passage of TRA 86, tax practitioners and their clients have faced substantial tax law changes. In particular, the phase-out of the personal interest deduction has moved the mortgage interest deduction into the limelight as an important tax planning strategy.
Mortgage interest is interest incurred on a loan secured by a qualified residence.
Loans secred by a principal residence, including first and second mortgages home equity loans, and refinanced mortgages are includable in the definition of mortgage interest. 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.