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Question by : How does mortgage interest work when dealing with tax returns?
How does a mortgage work when dealing with tax returns?Do we get back all the interest that we pay off or a certain percentage? Please provide backup in your answer.

Best answer:

Answer by Yirmiyahu
http://www.irs.gov/formspubs/article/0,,id=242605,00.html

Fully deductible interest. In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.

If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct.

The three categories are as follows.
Mortgages you took out on or before October 13, 1987 (called grandfathered debt).

Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2010 these mortgages plus any grandfathered debt totaled $ 1 million or less ($ 500,000 or less if married filing separately).

Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2010 these mortgages totaled $ 100,000 or less ($ 50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home

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