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Substantial improvement debt is considered acquisition debt and is a deduction on your Schedule A as mortgage interest paid. In order to be a substantial improvement, the improvement has to add to the home’s value, prolong the life of the home, or adapt the home to a new use. Here is a link to Publication 936. Look under Substantial Improvement. http://www.irs.gov/publications/p936/ar02.html#en_US_2011_publink1000230004
If you should have been deducting this interest in the past but had not, you can amend the open tax years (2008-2011) in order to take this deduction.
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