Introduced along with the income tax in 1913, the mortgage interest tax deduction has since become the favorite tax deduction for millions of U.S. homeowners. Here we look at the existing rules behind this deduction, as well as what its future may be in the face of proposed tax reforms.

Limitations
In most cases, all mortgage interest can be deducted from U.S. federal taxes, provided the homeowner meets the following requirements:

• He or she files Form 1040 and itemizes deductions on Schedule A.
• He or she is legally liable for the loan - you cannot deduct interest if you make a payment on someone else's loan.
• He or she made the payment on a qualified home.

Of course, because the deductions are regulated by the government, the rules are never quite as simple as they seem at first glance. There are two types of debt that generate tax-deductible interest. The first is debt that was taken out in order to buy, build or improve your home. This type of debt is known as "acquisition debt". The second type is debt that was taken out for other purposes and is known as "equity debt" because it draws on the equity of your property. Between the two, you can take out $1.1 million in debt and deduct the full amount of mortgage interest, provided that all mortgages fit into one of the following categories:

• Pre-October 13, 1987, Debt: If you took out your mortgage prior to this date, you can deduct the full amount of all interest paid. Mortgages taken out prior to October 13, 1987, are referred to as "grandfathered debt".
  
  
• Post-October 13, 1987, Debt: Interest on a mortgage taken out to buy, build or improve your home after October 13, 1987, may be fully deducted only if the total debt from all mortgages, including any grandfathered debt, amounts to $1 million or less for married couples and $500,000 or less for singles or married couples filing separately.
  
  
• Home Equity Debt Post-October 13, 1987: Mortgages taken out after October 13, 1987, for reasons other than to buy, build or improve your home must total $100,000 or less for married couples and $50,000 or less for singles or married couples filing separately. They must also total less than the fair market value of your house minus the value of all grandfathered debt and all post-October 13, 1987, mortgage debt.

If you managed to follow that logic without getting confused, you are in good shape so far - but don't start your deductions yet. There are additional stipulations. Even if you qualify for the deduction based on the criteria outlined above, you cannot take the deduction unless your mortgage is classified as secured debt, which means that your home must serve as collateral for the debt. If it is unsecured debt, it is considered a personal loan, and the interest on it is not deductible.