In general, interest is not deductible. But, a major exception to the rule of non-deductibility exists for “qualified residence interest” – that’s interest that is paid or accrued during the tax year on “acquisition indebtedness” or “home equity indebtedness” for any “qualified residence” of the taxpayer. Interest deductibility is limited to the first $1,000,000 of acquisition debt ($500,000 for married persons that file separately) and $100,000 of qualifying home equity indebtedness.
It has been the general view that the $1,000,000 cap is a limit on both types of indebtedness in a single loan. But, in late 2009 IRS said that a taxpayer can treat up to $100,000 in excess of the $1,000,000 limit as “home equity indebtedness” for deduction purposes. "Now, IRS has reiterated its position in a Revenue Ruling.
The Home Mortgage Interest Deduction Limitation -- Recent Developments (PDF)