One of the biggest purchases you will probably make it your life is your home. Your home may also be the biggest tax deduction you have. In order to save as much money as possible you should know the ins and outs of the tax deductions regarding the liens or mortgages you have on your home.

Three primary ways exist to deduct the interest that you make as part of you mortgage payments. First, you can typically deduct all of the interest you pay on a first mortgage . Second, you can deduct interest on a second mortgage, such as equity loans and lines of credit. Lastly you can deduct interest on mortgage payments if you take money out of your home to make a purchase. In all three scenarios there are limitations that you need to be aware of as well.

First Mortgages

The amount of mortgage interest you can deduct on your federal tax returns is set by the Internal Revenue Service (IRS) and may change from year to year. As of 2010, the first limitation you should be aware of deals with the type of home that you can deduct loan interest on, which is a primary or vacation home—not rental or investment properties. If the home is a combination vacation-rental home you must live in the home at least 14 days of the year or more than 10 percent of the days it is rented in order for it to be considered a personal residence allowing  you to deduct the interest portion of the mortgage.

On a primary home, the loan interest deduction limitation is only for the first $1 million of the mortgage. Any interest on a mortgage amount for more than $1 million is not tax deductible.

Home Equity Lines and Loans

Home equity lines and home equity loans are typically second mortgages on a home. If the home has a first and second loan on the property, the interest deductions permitted are separate from one another. So, the amount of interest allowable on your first mortgage is separate from that of the interest you can deduct on your federal tax returns for a second mortgage.

The same limitations as to the type of home pertain to equity lines and loans as traditional first mortgages. This means that only primary and vacation homes qualify for interest tax deductions. Investment properties do not qualify for this type of interest deduction.

The maximum amount of interest a homeowner can deduct on home equity lines and loans is $100,000. Any equity line or loan that has an outstanding balance that exceeds $100,000 in interest payments for the year is not eligible for interest deductions.

Cashout Loans

There are also situations where homeowners take money out of their home to make a purchase, such as to buy a car or to pay for a college education. How you use money you take out of the home can affect the tax deduction you can take as well. In general, this money is treated as that of an equity line or loan, limiting the interest tax deduction to the first $100,000 of interest that you pay on the mortgage or loan amount.

These are general tax deduction rules that you should be aware of when placing a mortgage on a home for a purchase, refinancing a mortgage or taking equity out of the property. Consult with your tax advisor or contact the IRS directly to talk about your personal financial situation and how this affects your mortgage interest tax deduction eligibility. It is worth the time to make sure you are using one of the biggest purchases you make in life as one of your biggest tax deductions.