The $1.1 Million Mortgage Interest Limitation Explained

The mortgage interest deduction is a tax benefit for homeowners that reduces their taxable income. The regulations for this deduction have changed, creating different rules depending on when a mortgage was initiated. This article explains the older mortgage interest rules for “grandfathered” debt and how they contrast with current regulations.

The Pre-TCJA $1.1 Million Limitation

Before the Tax Cuts and Jobs Act (TCJA), homeowners could deduct interest on a larger amount of mortgage debt. These rules, which apply to mortgages obtained on or before December 15, 2017, were composed of two distinct categories of debt.

The primary component was acquisition indebtedness, which is debt used to buy, build, or substantially improve a qualified home. Under the pre-TCJA rules, the interest on up to $1 million of this type of debt was deductible ($500,000 for married filing separately). A qualified home is a taxpayer’s main residence and one additional home, such as a vacation property.

The second component was home equity indebtedness. This category included debt secured by a qualified home that was not acquisition indebtedness. Taxpayers could deduct interest on an additional $100,000 of this debt ($50,000 for married filing separately). The use of the loan proceeds was irrelevant; the interest was deductible whether the funds were used for home improvements or other personal expenses.

These two limits worked in conjunction, allowing taxpayers to deduct interest on a total of $1.1 million in mortgage debt. This was calculated by adding the $1 million for acquisition debt and the $100,000 for home equity debt.

Grandfathered Debt Rules

Mortgages used to buy, build, or improve a home and secured on or before December 15, 2017, are designated as “grandfathered debt.” These loans remain subject to the more generous $1 million limit on acquisition indebtedness, ensuring homeowners are not retroactively affected by newer regulations. The rule also extends to binding contracts to purchase a home in effect before December 15, 2017, if the purchase was completed before April 1, 2018.

When a taxpayer refinances a grandfathered mortgage, the new loan retains its status, but only up to the outstanding principal balance of the old mortgage at the moment of refinancing. Any cash taken out beyond that original loan balance is not considered grandfathered debt. This excess amount is treated as new debt and is subject to current limitations.

For instance, a homeowner with an original $800,000 grandfathered mortgage refinances when the remaining principal is $700,000, but takes out a new mortgage for $750,000. The original $700,000 portion of the new loan is treated as grandfathered debt. The additional $50,000 cash-out amount is subject to the new rules established by the TCJA.

While the original debt amount is protected under the old rules, any new funds borrowed against the property fall under the current, more restrictive regulations.

The Current Mortgage Interest Limitation

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced new rules for mortgage interest deductions for debt incurred after December 15, 2017. Through the end of 2025, the legislation lowered the limit on deductible acquisition indebtedness to $750,000. For married taxpayers filing separate returns, the limit is $375,000.

A major change under the TCJA was the suspension of the deduction for interest on home equity indebtedness. An exception to this rule allows interest on a home equity loan, HELOC, or second mortgage to be deducted if the proceeds are used to “buy, build, or substantially improve” the home securing the loan. In these cases, the debt is treated as home acquisition debt and is subject to the single $750,000 total limit. The substance of how the loan is used, not its name, determines its deductibility.

These TCJA provisions are temporary. Beginning January 1, 2026, the rules for the mortgage interest deduction are set to revert to the pre-TCJA laws unless Congress passes new legislation. This would restore the $1 million acquisition debt limit and the deduction for interest on up to $100,000 of home equity indebtedness.

Calculating the Deduction with Mixed-Use Mortgages

Taxpayers who hold both grandfathered debt and newer mortgages must follow a specific calculation process. This situation commonly arises when a homeowner with a pre-TCJA mortgage takes out a new home equity loan after 2017. The key is to apply the separate limitations to each category of debt correctly.

Consider a taxpayer with a $600,000 grandfathered mortgage from 2016. In 2025, they take out a $200,000 home equity loan and use the funds to build a home addition. Because the new loan is used to improve the home, it qualifies as acquisition debt. The $750,000 limit for this new debt is reduced by the amount of the grandfathered debt. The taxpayer can treat $150,000 of the new loan as deductible ($750,000 limit – $600,000 grandfathered debt), for a total deductible mortgage debt of $750,000.

If the $200,000 home equity loan was used for a non-qualifying purpose, such as paying off student loans, the calculation changes. The interest on the $600,000 grandfathered loan would be fully deductible because it falls under the old $1 million limit. However, the interest on the $200,000 home equity loan is non-deductible because the funds were not used to improve the home.