Interest on home equity debt is tax-deductible only if you use the funds for renovations to your home—the phrase is "buy, build, or substantially improve."
What's more, you must spend the money on the property whose equity is the source of the loan. If you meet the conditions, interest is deductible on a loan/s of up to $750,000 ($375,000 or more for a married taxpayer filing a separate return).
I realize the money lent must be used to improve the property securing the loan (to be deductible). The question is, what defines the property improved? Is it just the house, or does it include improvements to the homestead, e.g., retaining walls, boat dock, irrigation system in the yard?
@rdstageberg see the chart on page 10 for examples and commentary.
The reference to publication 523 is for determining the basis on your property when selling your home but does include examples of substantial improvements that satisfy the interest deduction. In general, an improvement is substantial if it adds to the value of your home, prolongs your home's useful life, or adapts your home to new uses (pub 936 p.10). Unlike figuring your home's basis, improvements no longer existing due to obsolescence or replacement will continue to satisfy the interest deduction.