Qualified residence interest is the most significant exception to the limitations imposed by § 163(h) of the Internal Revenue Code.
163 of the IRC permits deductions for interest paid or accrued during the taxable year.
[2] However, the Tax Reform Act of 1986 severely limited the scope of this interest deduction.
In effect, the Tax Reform Act changed § 163 from a general rule for deduction into one of non-deduction with six discreet exceptions.
In order to use the deduction, the taxpayer must have paid or accrued interest during the taxable year from one of two of the following sources.