For purposes of calculating deductible mortgage interest, you can include the interest from the amount of your loan that was used to buy, build, or improve the home that it’s secured by. As long as those closing costs were for the mortgage that is secured by the home, they are included as part of buying the home. You would only exclude the amount if it were a different home or mortgage.
Examples of common ways you might have used this money not on your home include:
- Making a downpayment on a different home
- Funding improvements on a different home
- Making a payment on a different loan or debt
- Having miscellaneous large purchases
Example: John took out a home equity line of credit on his home on Tuberose Street for $40,000. He used $25,000 to remodel his kitchen and bathrooms in his Tuberose Street home, and $15,000 as a downpayment on a second house on Snowdrop Lane. He can only deduct the interest he paid on $25,000 he used to improve his Tuberose Street home.
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