Deduct mortgage interest on vacation home

[Kate Christenbury]

If I do a cash-out refi on my primary home, and use the money to pay cash for a vacation home, can I deduct the entire mortgage interest? Or can I only deduct the amount that I owe on my primary home? It seems odd that if I get a new mortgage I can deduct the interest on the vacation home, but if I consolidate primary and second into a single mortgage, I can’t take the deduction. If this is the case, what’s the logic behind it?

[Kory Reynolds]

The IRS defines home acquisition interest (which you can take as an itemized deduction) for your first and secondary residences as debt used to buy or build a home, and should be secured by THAT qualified residence. Thus, a refi on the first home to acquire a second home, even though secured by the first, seems to fall under the guidelines and would not be deductible. Logical...not really, but my guess is it is to help prevent abuse - IE major cash out refi, cash buy a property, have cash left over your use for other purposes not allowed, but the Bank already doesn't care. Making it be secured by that residence provides a check in place by the bank - bank would be unlikely to give a loan on something when the numbers dont. See IRS Publication 936 for all the good stuff, but  important bits below:

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

But hold up... That sounds promising, right? But... Further on down when we get the below which blows it up:

Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It must also be secured by that home.