Understanding the Current Limit on Deductible Mortgage Debt

For homeowners, the mortgage interest deduction has long been a significant tax benefit, but its parameters were fundamentally reshaped by the Tax Cuts and Jobs Act (TCJA) of 2017. The current landscape, which remains in effect through 2025 unless Congress acts to extend or modify it, establishes clear but reduced limits on the amount of mortgage debt for which interest can be deducted. Navigating these rules is essential for taxpayers seeking to maximize their deductions and understand their financial obligations.

The cornerstone of the current law is a lower cap on the principal balance of mortgages that qualify for the interest deduction. For debt incurred after December 15, 2017, the limit is set at $750,000. This applies to the combined total of mortgage debt used to acquire, build, or substantially improve a primary residence and a second home. It is critical to note that this is not an annual deduction limit but a cap on the amount of debt on which the interest payments are deductible. For instance, a homeowner with a $1 million mortgage can only deduct the interest attributable to the first $750,000 of that debt. Homeowners who secured their mortgages before December 16, 2017, are generally grandfathered under the previous, higher limit of $1 million in qualifying acquisition debt. This grandfathering applies even if the loan is refinanced, provided the new principal balance does not exceed the original mortgage amount.

Beyond acquisition debt, the rules for home equity debt became far more restrictive. Prior to the TCJA, interest on home equity loans or lines of credit (HELOCs) was often deductible regardless of how the funds were used, up to certain limits. The current law abolished this separate category. Now, for debt incurred after 2017, interest is only deductible if the borrowed funds are used to “buy, build, or substantially improve” the home that secures the loan. This is known as the “qualified use” requirement. Consequently, using a HELOC to pay for a child’s college tuition, consolidate credit card debt, or take a vacation no longer yields deductible interest, even if the loan is within the overall $750,000 debt limit. The interest on such funds is treated as personal interest, which is not deductible.

Another pivotal change that interacts with the debt limit is the dramatic increase in the standard deduction. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. Because the TCJA also limited or eliminated other itemized deductions, such as state and local tax (SALT) deductions, many homeowners now find that their total itemizable expenses—including their now-capped mortgage interest—do not exceed the standard deduction. As a result, they receive no actual tax benefit from their mortgage interest, rendering the debt limit moot for their specific return. This shift means the mortgage interest deduction now primarily benefits higher-income homeowners in expensive housing markets whose itemized deductions surpass the standard deduction threshold.

In summary, the current limit on deductible mortgage debt is primarily defined by a $750,000 cap for new mortgages on a primary and secondary residence, with a grandfather clause protecting older mortgages up to $1 million. This framework is tightly coupled with the requirement that deductible interest must come from debt used for residential acquisition or improvement, eliminating the deduction for interest on home equity funds used for other purposes. As taxpayers assess their financial decisions, from buying a home to considering a renovation loan, understanding these parameters is crucial. The future of these limits remains uncertain as the TCJA provisions are set to expire after 2025, potentially reverting to prior law, but for now, these rules define the boundaries of this once-universal homeowner benefit.