8034 / What limitations apply to a taxpayer’s ability to deduct mortgage interest?

There is a limitation of $750,000 ($1,000,000 prior to 2018) on the amount of aggregate debt that may be treated as “acquisition indebtedness,” but the amount of refinanced debt that may be treated as acquisition indebtedness is limited to the amount of debt being refinanced.¹ Prior to 2018, the deductibility of interest incurred on “home equity indebtedness” was limited to debt of $100,000, or the amount of equity (that is, the fair market value of the home less the acquisition indebtedness), whichever is less.² Home equity indebtedness interest cannot be deducted for tax years beginning after December 31, 2017 (note, however, that interest may continue to be deductible if the home equity debt would also qualify as acquisition indebtedness). The 2025 OBBB made the $750,000 reduced limit permanent.³

The new $750,000 limit does not apply with respect to debt incurred on or before December 15, 2017. If the taxpayer entered a binding contract on or before December 15, 2017 to close on the purchase of the taxpayer’s personal residence before January 1, 2018, and if the taxpayer actually purchased that residence before April 1, 2018, the debt will be treated as though it was incurred before December 15, 2017.⁴

The effect of this limitation is that for transactions after 1987 and before 2018, a homeowner who wishes to borrow against home equity can deduct the interest only on $100,000 of such debt or on the amount that is equal to home equity, whichever is less. Interest on amounts over this limit does not qualify as “home equity indebtedness.”

Indebtedness incurred on or before October 13, 1987 (and limited refinancing of it, see below) that is secured by a qualified residence is considered acquisition indebtedness. This pre-October 14, 1987 indebtedness is not subject to the $1,000,000 aggregate limit, but is included in the aggregate limit as it applies to indebtedness incurred after October 13, 1987.⁵