Legal Definitions - qualified residence interest

Qualified residence interest refers to the interest paid on a loan that is secured by your main home or a second home, and which meets specific criteria set by tax law to be deductible. This typically includes interest on mortgages used to buy, build, or substantially improve your home, as well as certain home equity loans or lines of credit, up to specific dollar limits.

Here are some examples:

• Example 1: Primary Home Acquisition

  Sarah and Tom take out a $400,000 mortgage to purchase their first house, which will be their primary residence. Throughout the year, they pay $15,000 in interest on this mortgage.

  This $15,000 in interest is considered qualified residence interest because it's paid on a loan used to acquire their main home, and it falls within the IRS's specified debt limits for acquisition indebtedness.

• Example 2: Home Improvement Loan

  David owns a home he purchased several years ago. He decides to add a new bedroom and bathroom, taking out a $75,000 home equity loan, secured by his house, to finance the construction. He pays $4,000 in interest on this loan during the year.

  The $4,000 interest David paid is qualified residence interest because the loan is secured by his main home and the funds were used to substantially improve that residence, meeting the criteria for deductible home equity debt within the applicable limits.

• Example 3: Second Home Mortgage

  Maria owns a small cabin by a lake that she uses as a vacation home a few weeks each year. She has a mortgage on this cabin and pays $7,000 in interest annually.

  The $7,000 in interest Maria pays on her cabin mortgage qualifies as residence interest because the cabin serves as her second home, and the loan is secured by that property, falling within the IRS's rules for interest on a second qualified residence.