Can I deduct the interest I pay on a 401(k) loan if I use the money to buy a
house?
You can deduct the interest you pay on a 401(k) loan if your house is
collateral for the loan. However, you must specify in the loan agreement
that the house will be collateral for the loan. Otherwise, you won’t be
able to deduct the interest you pay back to your 401(k) plan even if you use
the loan proceeds to buy a home.
Excerpt from the following. It's a nice link. http://moneycentral.msn.com/quickref/quickref
