Only you know that.
Fair market value is what a buyer would pay a seller in a fair market. It's your current market value. I'm not even sure why you would be asked that.
Acquisition debt is debt used to buy, build or substantially improve your home. Read more below.
You can deduct interest you pay on any mortgage, no matter the legal format, up to the amount of acquisition debt.
Acquisition debt is debt used to buy, build, or substantially improve your home.
For example: You buy a home for $100,000 in 2009 with an $80,000 mortgage. In 2017, your mortgage balance is paid down to $65,000. You refinance for $125,000 and use $10,000 to remodel the kitchen. Your acquisition debt is (65K+10K) = $75,000, so you can deduct 75/125th or 60% of your interest.
It doesn't matter if you got a new refinanced mortgage for $125,000, or if you kept the original mortgage and took out an HELOC for $50,000. Either way, you now have $125,000 of total debt, of which $75,000 is acquisition debt and $50,000 is equity debt.
Also note that there are additional limitations in "retroactively" paying for improvements. Debt only counts as acquisition debt if the loan is taken out 2 years or less before the purchase or improvements are completed, up to 90 days after the purchase or improvements is completed. If you take out an equity loan in 2018, and want to say that the kitchen remodel you did in 2017 for cash, is actually part of your acquisition debt, you can't. You would have to take the debt out before the work or within 90 of completing the work.
You should keep all the paperwork relating to purchasing and home and your home improvements for as long as you own the home, plus 6 years, in case of audit. If you can't prove your costs to buy or improve your home and are audited, the IRS may reduce or disallow certain deductions.
