There are limitations on the amount of interest you can claim.  For example, if the loan balance was over $1 million during the year, then part of the interest will be disallowed.  Further, if an equity loan of more than $100,000 is outstanding and none of the proceeds went to improving the home, then there is a limitation on the interest.

Please read http://www.irs.gov/publications/p936/ar02.html for more information on loan interest deduction including the limited deduction for points paid to secure a loan.

Chief Counsel Advice 201451027

In Chief Counsel Advice (CCA), IRS addresses the issue of who is entitled to claim a home mortgage interest deduction where the underlying property is owned by more than one taxpayer, and mortgage payments are made by one or both of them.

Background. In general, a deduction for interest is available only to those who are primarily liable on the underlying debt. Where, however, two or more persons are jointly and severally liable for a debt, each is primarily liable for that debt, and each is entitled to a deduction for the interest on that debt that he or she pays.

Under Code Sec. 163, a taxpayer is generally allowed a deduction (within dollar limits) for interest paid or accrued on qualified residence interest, which includes interest paid on acquisition debt with respect to any qualifying residence of the taxpayer. Under Reg. § 1.163-1(b), a taxpayer may deduct, as home mortgage interest, interest he paid on a mortgage on real estate of which he is the legal or equitable owner, even though he is not directly liable on the bond or note secured by the mortgage.

Where more than one taxpayer is liable on a home mortgage obligation, questions may arise as to which taxpayer is entitled to an residence interest deduction. The new CCA addresses three such situations.

Situation 1. Taxpayers are a married couple and are jointly and severally liable on a mortgage. One spouse is deceased at the end of the tax year and the bank issues a Form 1098 (Mortgage Interest Statement) under that spouse's social security number. The surviving spouse files a separate return. Payments on the mortgage may be made from a joint account or from separate funds of either taxpayer.

Situation 2. Taxpayers are an unmarried couple and are jointly and severally liable on a mortgage. The bank either issues a Form 1098 under only one social security number, or under both. One or both taxpayers claims the mortgage interest deduction on their individual returns. Payments on the mortgage may be made from a joint account or from separate funds of either taxpayer.

Situation 3. Related persons co-own a house and are liable on a mortgage note. A bank may issue a Form 1098 under the name of one or both of the co-obligors. Each taxpayer claims 50% or 100% of the deduction. Payments on the mortgage may be made from a joint account or from separate funds of either taxpayer.

IRS analysis. After reviewing a number of cases and rulings on the subject, the CCA concludes that funds paid from a joint account with two equal owners are presumed to be paid equally by each owner, in the absence of evidence showing that that is not the case. It also says that a person who is jointly and severally liable on a home mortgage debt is entitled to deduct all the otherwise allowable interest on that debt, provided that person actually pays all the interest.

The CCA reaches back to Rev Rul 59-66, 1959-1 CB 60, to find the rule that applies where payment for a deductible amount is made from funds deposited in a joint checking account in which the husband and wife have an equal interest. In this situation, in the absence of competent evidence to the contrary, the amount is presumed to be paid equally by the husband and wife for the purpose of computing the deduction when the husband and wife file separate returns.

IRS's findings. The CCA concludes that:

• . . . In Situation 1, in determining the amount of interest deductible on the decedent's return, the general rules regarding payment from joint or separate accounts, and joint liability should apply. For example, if the decedent paid interest from a joint account before death, his return should reflect one-half of the interest paid from the joint account before the time of death, in the absence of evidence that the interest was paid from the decedent's separate funds. In years following the year of death, the surviving spouse may claim the deduction for interest since he or she is liable on the note, assuming the surviving spouse makes the interest payments and all other requirements are met.

• . . . In Situation 2, since both taxpayers are liable on the mortgage, both are entitled to claim the mortgage interest deduction to the extent of the mortgage interest paid by either taxpayer. If the mortgage interest is paid from separate funds, each taxpayer may claim the mortgage interest deduction paid from each one's separate funds. If the mortgage interest is paid from a joint bank account in which each has an equal interest, under Rev Rul 59-66, it would be presumed that each has paid an equal amount absent evidence to the contrary.

• . . . In Situation 3, the CCA concludes that if co-owners of a house are both liable on a mortgage, each one may take a deduction for the amount each one pays, subject to the limitations and requirements of deducting mortgage interest under Code Sec. 163(h).