The mortgage interest deduction is the deduction an individual takes for qualified residence interest, meaning interest paid or accrued during the taxable year on debt used to acquire, construct or substantially improve a home and secured by that home. It is not a standalone allowance. It is a carve-out from a rule that disallows personal interest, which is why the deduction is defined by what escapes the disallowance rather than by what the Code grants.
The Deduction Is an Exception, Not a Grant
The Code starts by allowing interest broadly. There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness (26 U.S.C. 163(a)).
It then takes most of that back from individuals. In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year (26 U.S.C. 163(h)(1)).
Personal interest is then defined by exclusion, and the definition carries its own scope words. For purposes of this subsection, the term personal interest means any interest allowable as a deduction under this chapter other than interest on indebtedness properly allocable to a trade or business, other than the trade or business of performing services as an employee, any investment interest within the meaning of subsection (d), any interest taken into account under section 469 in computing income or loss from a passive activity, any qualified residence interest within the meaning of paragraph (3), any interest payable under section 6601 on unpaid estate tax during a section 6163 extension, and any interest allowable as a deduction under section 221 relating to interest on educational loans (26 U.S.C. 163(h)(2)).
Home mortgage interest survives because of the fourth of those six exceptions. Everything the term mortgage interest deduction means sits inside the definition of qualified residence interest, and nowhere else.
What Qualified Residence Interest Covers Now
For purposes of that subsection, qualified residence interest means any interest paid or accrued during the taxable year on acquisition indebtedness with respect to any qualified residence of the taxpayer, or on home equity indebtedness with respect to any qualified residence of the taxpayer, and whether a property is a qualified residence is determined as of the time the interest is accrued (26 U.S.C. 163(h)(3)(A)).
Read on its own, that is two routes in. Only one of them is currently open. In the case of taxable years beginning after December 31, 2017, subparagraph (A)(ii) shall not apply (26 U.S.C. 163(h)(3)(F)(i)(I)), and (A)(ii) is the home equity indebtedness limb. Interest on a home equity loan is therefore deductible only where the borrowing itself meets the acquisition indebtedness test, not because the loan is secured by the house.
Acquisition Indebtedness Has Two Conditions, and Both Must Hold
The term acquisition indebtedness means any indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and which is secured by such residence (26 U.S.C. 163(h)(3)(B)(i)).
Use and security are joined by “and”. A loan secured by the home but spent on something else fails the first condition, and an unsecured loan spent on a renovation fails the second, and both fail the same way: the interest becomes personal interest and disappears under 163(h)(1) rather than becoming a smaller deduction.
Refinancing is handled inside the same clause and is capped inside it. The term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence, or of that sentence itself, but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness (26 U.S.C. 163(h)(3)(B)(i)). Cash taken out above the old balance is not acquisition indebtedness by virtue of the refinancing.
Three Debt Tiers, Not One Limit
The figure most people quote is one of three, and which one applies turns on when the debt was incurred. The tiers are debt incurred on or before October 13, 1987, debt incurred after that date and on or before December 15, 2017, and debt incurred after December 15, 2017. They are built out of two rules that follow.
The statutory ceiling. The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000, or $500,000 in the case of a married individual filing a separate return (26 U.S.C. 163(h)(3)(B)(ii)).
The substituted ceiling. For taxable years beginning after December 31, 2017, subparagraph (B)(ii) shall be applied by substituting “$750,000 ($375,000” for “$1,000,000 ($500,000” (26 U.S.C. 163(h)(3)(F)(i)(II)).
The grandfathered tier, and it is two rules rather than one. That substitution shall not apply to any indebtedness incurred on or before December 15, 2017, and, in applying the substitution to any indebtedness incurred after that date, the limitation under it shall be reduced, but not below zero, by the amount of any indebtedness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of the subsection for the taxable year (26 U.S.C. 163(h)(3)(F)(i)(IV)).
Dropping the second half of that is the most expensive misreading available here. Older debt is not simply left alone at the higher ceiling. It also eats into the lower ceiling that applies to anything borrowed afterwards, dollar for dollar, so a taxpayer carrying grandfathered debt has less room for new acquisition debt than a taxpayer with none.
A dated exception sits beside it. In the case of a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, the grandfathering subclause is applied by substituting April 1, 2018 for December 15, 2017 (26 U.S.C. 163(h)(3)(F)(i)(V)). Every element of that is a condition: the written binding contract, its date, the contracted closing date and the actual purchase date.
A third tier still exists for very old borrowing. In the case of pre-October 13, 1987 indebtedness, such indebtedness shall be treated as acquisition indebtedness and the limitation of subparagraph (B)(ii) shall not apply, and that same limitation shall be reduced, but not below zero, by the aggregate amount of outstanding pre-October 13, 1987 indebtedness (26 U.S.C. 163(h)(3)(D)(i) and (ii)). The pattern repeats: uncapped itself, and it consumes the cap that applies to everything newer.
Refinancing Keeps the Original Date
A refinancing does not push debt from an older tier into a newer one. In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of the grandfathering clause as incurred on the date that the original indebtedness was incurred, to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness (26 U.S.C. 163(h)(3)(F)(ii)(I)).
That inheritance runs out. It shall not apply to any indebtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness, or if earlier, the date which is 30 years after the date of such 1st refinancing (26 U.S.C. 163(h)(3)(F)(ii)(II)).
The Lower Ceiling Is Now Permanent
This is the part of the subject most likely to be stale in anything written before mid-2025. Subparagraph (F) originally applied only to taxable years beginning after December 31, 2017 and before January 1, 2026, so the $750,000 ceiling and the home equity disallowance were both scheduled to lapse. Public Law 119-21 struck the words “, and before January 1, 2026” from the introductory provisions of clause (i), and changed the subparagraph’s heading from “2018 through 2025” to “beginning after 2017” (26 U.S.C. 163, Editorial Notes, 2025 Amendments).
The same Act also struck the former clause (ii) and redesignated the clauses that followed. The editorial note records what that clause had said: “In the case of taxable years beginning after December 31, 2025, the limitation under subparagraph (B)(ii) shall be applied to the aggregate amount of indebtedness of the taxpayer described in subparagraph (B)(i) without regard to the taxable year in which the indebtedness was incurred.” (26 U.S.C. 163, Editorial Notes, 2025 Amendments). That clause would have collapsed the tiering below, applying one limitation to all acquisition indebtedness whenever it was incurred. Removing it leaves the tiers standing, and with the end date gone from clause (i) there is no scheduled reversion to the higher ceiling to plan around.
Which Homes Count, and How Many
Qualified residence is a defined term, and it is short. For purposes of this subsection, the term means the principal residence of the taxpayer within the meaning of section 121, and 1 other residence of the taxpayer which is selected by the taxpayer for purposes of the subsection for the taxable year and which is used by the taxpayer as a residence within the meaning of section 280A(d)(1) (26 U.S.C. 163(h)(5)(A)(i)).
That pin cite moved recently. The definition sat at 163(h)(4) until Public Law 119-21 added a new paragraph (4) for qualified passenger vehicle loan interest and redesignated the former paragraph (4) as paragraph (5) (26 U.S.C. 163, Editorial Notes, 2025 Amendments). Anything citing 163(h)(4) for the meaning of qualified residence is now pointing at a different rule.
Two sub-rules matter in practice. If a married couple does not file a joint return for the taxable year, such couple shall be treated as 1 taxpayer for purposes of clause (i), and each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence (26 U.S.C. 163(h)(5)(A)(ii)). And for the second-residence limb, notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year (26 U.S.C. 163(h)(5)(A)(iii)).
Where It Lands on the Return
The deduction is claimed as an itemized deduction. Schedule A reaches it at line 8, Home mortgage interest and points, splitting interest reported to the taxpayer on Form 1098 at line 8a from interest not reported on Form 1098 at line 8b, with points not reported on Form 1098 at line 8c, and the form’s own caution on that block reads that the mortgage interest deduction may be limited (IRS, Schedule A (Form 1040), 2025).
That last point is the practical one for a preparer. The Form 1098 figure is what the lender paid out interest on, not what the Code allows, and nothing on the form applies the ceilings above. How the itemized route compares with the alternative is set out in standard deduction, and the separate premium that the Code treats as qualified residence interest under its own clause is worked through in mortgage insurance premiums.
Common Questions
Interest on acquisition indebtedness up to the ceiling that applies to when the debt was incurred: $750,000, or $375,000 for a married individual filing separately, for debt incurred after December 15, 2017, and $1,000,000 or $500,000 for debt incurred on or before that date (26 U.S.C. 163(h)(3)(B)(ii) and (F)(i)(II) and (IV)). Grandfathered debt reduces the lower ceiling available for anything borrowed afterwards, so the two tiers are not simply added together.
Only where the borrowing is itself acquisition indebtedness, because the home equity limb of the definition is switched off for taxable years beginning after December 31, 2017 (26 U.S.C. 163(h)(3)(F)(i)(I)). A home equity loan spent on acquiring, constructing or substantially improving the qualified residence that secures it meets the acquisition test on its own terms (26 U.S.C. 163(h)(3)(B)(i)).
Yes, on one other residence besides the principal residence, selected by the taxpayer for the taxable year and used by the taxpayer as a residence (26 U.S.C. 163(h)(5)(A)(i)). The ceilings apply to the aggregate, not to each house.
No. It was scheduled to, and Public Law 119-21 removed the end date from the clause that carried it (26 U.S.C. 163, Editorial Notes, 2025 Amendments).
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