What are the limits to the interest expense deduction?

First, the 2% reduction applies to certain interest expenses, principally home mortgage interest and student loan interest. While the 2% reduction does not apply to investment interest expenses, there is a limitation that you can only deduct investment interest up to the amount of your net investment income.

With home mortgage interest, in addition to the 2% reduction, there are further limitations. For example, if the mortgage is a home equity loan or a home acquisition loan, you can only deduct interest associated with loans secured by your principal residence and one second home (but if you own more than two homes, you can choose which home to count as you second home). There are certain other limits which apply to these interest expenses, and you should discuss them with a tax advisor.