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This is an area that is widely misunderstood and can cause some real problems, but not for my friendly readers. You can deduct mortgage interest when you borrow money to either purchase or improve your principal residence or purchase or improve a second home. If the money borrowed is for anything else, such as rental property, third home, refinancing (above the loan balance incurred to buy the home), the interest isn’t home mortgage interest. Also a qualified home can be a town home, condo, and even a house boat with sleeping and toilet facilities. Moreover, the mortgage must be secured by the home you are buying. It can’t be placed on one home in order to buy another home. To most people’s surprise, there is an overall limit on the detectability of interest. This limit is based on a maximum loan amount of $1,000,000 although you can deduct interest on another $100,000, which is called home equity interest. Thus, the interest is limited to a total amount of debt of 1.1 million, which includes the total amount of debt on both a primary home and one second home. Any interest incurred on higher debt is NOT qualified home mortgage interest. What happens to the excess interest? It depends on what you use the money for? If used for business , it is deductible as a business expense. If used for personal expenses, it won’t be deductible.