You can deduct mortgage interest on your acquisition cost, money used to buy, build, or substantially improve your home.
You can deduct the interest on loan 1. You can't currently deduct the interest on loan 2, and the only thing in your to-do list that would qualify as a substantial improvement is new floors, and maybe a new fence. Repairs and routine maintenance do not count as substantial improvements. However, any improvements you make only count as acquisition costs for the interest deduction if the work is completed in 2 years or less from the date you took out the loan. If you sit on the money too long, it won't count as deductible interest even if you use it for improvements.
The IRS formula for deducting mortgage interest requires that you enter both loans and then report how much, if any, you used for acquisition costs. If you are paying interest on loan 2, and the money is sitting in the bank waiting to be used, you will get a 1098 for that mortgage and you need to list it so that Turbotax can include the balance in the calculation of the deductible percentage of total interest you can deduct.
For example, if your first loan is for $20,000 for the roof, and your second loan is $30,000 not currently used for improvements, then 40% of your total interest is deductible. The deductible amount is calculated on the total, not by listing one mortgage and ignoring the other.
