You closed on a house in 2018 with a $900,000 mortgage. Your neighbor closed in 2016 with a $1.1 million mortgage. Both of you write the same monthly check to the same lender, both of you itemize, and both of you sit down with Form 1098 in February. Yet only one of you can fully deduct the interest. The other has to fill out a worksheet, multiply by a ratio, and watch a chunk of the deduction vanish.
That is Section 163(h) of the Internal Revenue Code in real life. It is the rule that decides whether the largest single line on your Schedule A is a $14,000 deduction or an $8,500 deduction. It is also one of the most misunderstood corners of the tax code, with three different debt limits, two different cutoff dates, a special rule for HELOCs, and a brand-new mortgage insurance premium deduction that just came back in 2026 after disappearing for two years.
This guide unpacks all of it — what changed under the Tax Cuts and Jobs Act (TCJA), what changed again under the One Big Beautiful Bill Act (OBBBA), and how to keep your records clean enough to claim every dollar you are entitled to without inviting questions on audit.
Why This Deduction Still Matters in 2026
The mortgage interest deduction is the largest itemized deduction by dollar volume that most homeowners will ever claim. In the most recent IRS data, 17.8 million returns claimed it, with a total tax expenditure of roughly $52.6 billion.
That said, the population of beneficiaries is much smaller than it used to be. Before TCJA, about 30 percent of taxpayers itemized. Today, with the standard deduction at $16,100 for single filers and $32,200 for married filing jointly in 2026, only about 14 percent of returns itemize at all. Nearly 97 percent of the deduction's dollar value flows to taxpayers with incomes above $100,000, and 78 percent goes to those above $200,000.
So this is a deduction that primarily helps higher-income homeowners with sizable mortgages — and for those people, getting the math right is worth thousands of dollars a year.
The Three Debt Limits You Have to Know
Section 163(h) and the related regulations create three different categories of "home acquisition indebtedness," each with its own cap. Which bucket you fall into is determined entirely by the date you signed the loan.
Bucket 1: Pre-October 14, 1987 (Grandfathered)
If you took out a mortgage on a qualified home before October 13, 1987, there is no dollar limit on the interest you can deduct, and there are no restrictions on how the proceeds were used. This bucket is mostly historical — very few of these loans are still outstanding — but it matters for older homeowners who never refinanced.
Bucket 2: October 14, 1987 Through December 15, 2017
Mortgages incurred during this window qualify for a $1 million combined limit on acquisition debt ($500,000 if married filing separately). There is also a binding-contract exception: if you signed a written, binding contract to buy a home before December 15, 2017, and the purchase closed before April 1, 2018, you can use the $1 million cap even though you closed after TCJA took effect.
Bucket 3: After December 15, 2017
This is the TCJA bucket and the one most homeowners are working with. The limit on acquisition indebtedness is $750,000 ($375,000 if married filing separately). The OBBBA's Section 70108 made this $750,000 cap permanent. It was originally scheduled to sunset on December 31, 2025, and revert to the old $1 million limit, but Congress made the lower threshold permanent before the sunset hit.
This matters because every analysis from a few years ago — including a lot of real estate marketing material — assumed the cap would jump back to $1 million in 2026. It did not. If you are planning a jumbo purchase, you should plan around $750,000 of deductible acquisition debt for the indefinite future.
What "Home Acquisition Debt" Actually Means
The cap applies to home acquisition debt, which has a precise statutory meaning. It is debt that meets three tests at the same time:
- Used to buy, build, or substantially improve a qualified home
- Secured by that qualified home
- Incurred after the home was acquired or in connection with the purchase, construction, or improvement
Every word matters here. A loan you take out and use to pay off credit cards is not home acquisition debt, even if the bank calls it a "second mortgage" and even if your house secures it. A loan you take out to fund a kitchen remodel that adds permanent value to the property is home acquisition debt, and the interest can be deductible.
The Death of the General "Home Equity Loan" Deduction
Before TCJA, you could deduct interest on up to $100,000 of home equity debt regardless of how you used the money. That category is gone. The exact statutory language in current IRS guidance reads:
"No matter when the indebtedness was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren't used to buy, build, or substantially improve your home."
So if you tap a HELOC to pay for a wedding, a car, or a tuition bill, the interest is nondeductible. If you tap the same HELOC to put on a new roof, the interest is deductible (subject to the $750,000 combined cap). The label on the loan does not matter — the use of the proceeds does.
What Counts as "Substantially Improve"
The IRS draws a line between maintenance and improvement. Routine repairs — repainting, replacing broken appliances, patching a roof — do not count. To qualify as substantial improvement, the work has to add permanent value, prolong the home's useful life, or adapt it to a new use. Common examples that qualify:
- Replacing the roof entirely
- Finishing a basement or attic
- Adding a bedroom, bathroom, or addition
- Installing a new HVAC system
- A full kitchen or bathroom remodel
- Installing solar panels or a permanent backup generator
Things that do not qualify on their own: cleaning gutters, repainting a room, replacing carpet, fixing a leaky faucet, or buying furniture.
The practical implication is that you need a paper trail for what the HELOC paid for. If your lender's records show $80,000 drawn from the HELOC and your contractor's invoices show $80,000 of kitchen remodeling, you are on solid ground. If you co-mingled the HELOC money with personal cash and ran the renovation out of a checking account, an examiner may force you to allocate the proceeds and disallow the interest associated with non-improvement use.
What Counts as a "Qualified Home"
You can deduct mortgage interest on your main home plus one other home you designate as your second home. Both have to qualify as a residence, which the IRS defines functionally: the property must have sleeping space, cooking facilities, and a toilet. That is permissive enough to cover:
- Single-family houses, condos, co-ops
- Townhomes
- Mobile homes
- Houseboats and RVs
- Cabins or vacation properties
If you own three or more places, you can pick which one is your designated second home each year. The choice is made on a year-by-year basis.
The 14-Day or 10 Percent Rule for Second Homes
If you rent out your second home, you must personally use it for more than 14 days during the year, or more than 10 percent of the days it was rented at fair market rent, whichever is greater. Fall short of that and the property is not treated as a residence under Section 280A; the interest gets handled under different rules and the acquisition-debt deduction does not apply.
This is the rule that catches a lot of part-time Airbnb hosts. If you bought a beach house, rented it 200 days, and spent 12 days at it yourself, the 14-day floor is not met, and the property does not qualify as a second home for Section 163(h) purposes.
Refinancing: The Grandfathering Trap Most Homeowners Miss
Refinancing a grandfathered loan is the single most common way to lose access to the $1 million cap by accident. The rule is mechanical: when you refinance, the new loan keeps grandfathered status only up to the principal balance of the old loan at the moment of refinancing. Anything above that gets treated as new acquisition debt subject to the $750,000 limit.
A worked example. You bought in 2015 with a $980,000 mortgage. By 2024 you have paid the balance down to $850,000. You refinance into a new $1,000,000 loan to pull out cash for an addition.
- $850,000 of the new loan is treated as grandfathered acquisition debt at the $1M cap.
- $150,000 is new acquisition debt subject to the $750K cap.
- Because $850,000 already sits in the grandfathered bucket, the new $150,000 does not get its own separate cap — it slots into your overall acquisition-debt total and may or may not be fully deductible depending on the rest of your debt.
Refinances done between December 16, 2017 and the end of 2025 preserved grandfathered status up to the old balance under a special transition rule. That continues to apply to those existing refinances under current IRS guidance, but new acquisitions stand on their own footing.
The other rule that gets refinance interest disallowed: if your original grandfathered loan was a balloon mortgage, the refinanced loan retains grandfathered status for a maximum of 30 years from the date the original balloon was refinanced. After that, it converts to a Bucket 3 loan.
The Mixed-Use Property and Home Office Wrinkle
If you use part of your home as a home office, a rental unit, or any other non-residential purpose, you have to allocate the mortgage debt and the interest between residential and non-residential use. The portion attributable to residential use stays under Section 163(h). The portion attributable to business or rental use shifts to Schedule C, Schedule E, or wherever the relevant business income is reported.
A rented portion of your home stays "residential" — meaning it counts as part of the qualified home — only if all three of these are true:
- The rented portion does not have its own independent sleeping, cooking, and toilet facilities (i.e., it is not effectively a separate dwelling unit)
- No more than two tenants occupy the rented space
- Renting is not your primary business activity at the property
Fall outside that and you are running a multi-unit property, and the interest allocation gets more complicated.
Mortgage Insurance Premiums Are Back in 2026
For 2022 through 2025, the deduction for mortgage insurance premiums (PMI, FHA premiums, VA funding fees) was off the books — it had expired and was not extended. OBBBA brought it back starting in 2026.
The 2026 mechanics:
- Premiums on acquisition indebtedness on a qualified home are treated as qualified residence interest and reported on Schedule A.
- They are not subject to the $750,000 acquisition debt cap (the premium deduction is separate from the interest deduction).
- The deduction phases out by 10 percent for every $1,000 ($500 if married filing separately) of AGI above $100,000 ($50,000 MFS). At $109,000 of AGI, the entire deduction is gone for joint filers; for MFS, the cliff hits at $54,500.
So if you bought with less than 20 percent down and you are paying PMI, you can pick up an additional deduction in 2026, but only if your AGI is moderate enough to clear the phase-out.
How to Report on Schedule A
For 2026 returns, the relevant lines are:
- Line 8a: Home mortgage interest reported on Form 1098.
- Line 8b: Home mortgage interest not reported on a 1098 (typically seller-financed). You also have to list the payee's name, address, and TIN.
- Line 8c: Points not reported on Form 1098 (or points reported on a 1098 that are deductible currently rather than amortized).
- Line 8d: Mortgage insurance premiums (back in play for 2026).
- Line 8e: Total of lines 8a through 8d.
When your loan balance pushes you over the cap, Publication 936's Table 1 worksheet is the official tool. It calculates your qualified loan limit and produces a single decimal "deductible ratio" that you multiply against the total interest paid for the year. The math is mechanical but the inputs — average balance, balance at refinance dates, allocations between acquisition debt and other debt — are where homeowners get tripped up.
Documentation That Saves the Deduction on Audit
There are five documents you want to keep in a single folder, ideally for the entire life of the home plus three years after sale:
- Original HUD-1 or Closing Disclosure showing the original loan amount and how proceeds were used.
- Form 1098 for every year of the mortgage. Lenders send this in January.
- Closing documents from any refinance, showing the principal balance immediately before the refinance, the new loan amount, and the breakdown of any cash-out.
- Contractor invoices and proof of payment for any work funded by a HELOC, home equity loan, or cash-out refinance that you are treating as acquisition debt.
- A simple ledger that ties each draw on a HELOC to specific improvement spending. If $80,000 was drawn, you want $80,000 of contractor invoices to match.
Without those records, an examiner can challenge your allocation between acquisition debt (deductible) and non-acquisition debt (not deductible), and you have no way to prove your position.
Common Mistakes That Cost Homeowners Money
- Deducting HELOC interest used for personal expenses. This is the single most common error post-TCJA. The rules changed in 2018; the habit did not.
- Treating routine repairs as substantial improvements. Replacing a broken appliance is a repair, not an improvement.
- Forgetting the binding-contract exception when claiming grandfathered status on a 2018 closing. If you signed before December 15, 2017, and closed before April 1, 2018, you are still under the $1M cap.
- Missing the second-home use threshold. Renting a vacation property out for most of the year without personally using it for 14 days disqualifies it.
- Pulling cash out without retracking the acquisition-debt portion. Every cash-out refinance shifts the math; tracking has to be redone.
- Assuming the deduction is worth claiming. Run the numbers. For many homeowners with mortgages under $400,000 in lower-rate environments, total itemized deductions still fall short of the standard deduction, and the mortgage interest deduction is irrelevant in practice.
Keep Your Mortgage Records Organized from Day One
The mortgage interest deduction rewards good records. Acquisition debt vs. home equity debt, principal balance at every refinance, the use of every HELOC draw — these are not numbers your lender will calculate for you, and they are not numbers tax software will guess at correctly without your inputs.
Beancount.io gives you plain-text accounting that makes this kind of tracking effortless. Every loan draw becomes a transaction, every contractor payment is tagged to a specific improvement project, and your acquisition-debt running balance is just a Beancount query away. It is transparent, version-controlled, and AI-ready — no black boxes, no vendor lock-in. Get started for free and bring the same engineering discipline to your finances that you bring to the rest of your life.
Sources: