Part II. Limits on Home Mortgage Interest Deduction

This part of the publication discusses the limits on deductible home mortgage interest. These limits apply to your home mortgage interest expense if you have a home mortgage that doesn't fit into any of the three categories listed at the beginning of Part I under Fully deductible interest, earlier.

Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that isn't more than your qualified loan limit. This is the part of your home mortgage debt that is grandfathered debt or that isn't more than the limits for home acquisition debt. Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest.

Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It must also be secured by that home.

If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that isn't more than the cost of the home plus substantial improvements qualifies as home acquisition debt.

Home acquisition debt limit. The total amount you (or your spouse if married filing a joint return) can treat as

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home acquisition debt on your main home and second home is limited based on when the debt is secured.

• For debt secured after October 13, 1987, and prior to December 16, 2017, the limit is $1 million ($500,000 if married filing separately).

• For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately). However, a taxpayer who entered into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchased such residence before April 1, 2018, is considered to have incurred the home acquisition debt prior to December 16, 2017.

The limits above are reduced (but not below zero) by the amount of your grandfathered debt (discussed later).

Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.

Mortgage that qualifies later. A mortgage that doesn't qualify as home acquisition debt because it doesn't meet all the requirements may qualify at a later time. For example, a debt that you use to buy your home may not qualify as home acquisition debt because it isn't secured by the home. However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Similarly, a debt that you use to buy property may not qualify because the property isn't a qualified home. However, if the property later becomes a qualified home, the debt may qualify after that time.

Mortgage treated as used to buy, build, or substan- tially improve home. A mortgage secured by a qualified home may be treated as home acquisition debt, even if you don't actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.

1. You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1, later.)

2. You build or substantially improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.

3. You build or substantially improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. (See Example 2, later.)

Example 1. You bought your main home on June 3 for $175,000. You paid for the home with cash you got from the sale of your old home. On July 15, you took out a mortgage of $150,000 secured by your main home. You used the $150,000 to invest in stocks. You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. The entire mortgage qualifies as home acquisition debt because it wasn't more than the home's cost.

Example 2. On January 31, Logan began building a home on the lot that Logan owned. Logan used $45,000 of personal funds to build the home. The home was completed on October 31. On November 21, Logan took out a $36,000 mortgage that was secured by the home. The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. The entire mortgage qualifies as home acquisition debt because it wasn't more than the expenses incurred within the period beginning 24 months before the home was completed. This is illustrated by Figure C.

Figure C.

Date of the mortgage. The date you take out your mortgage is the day the loan proceeds are disbursed. This is generally the closing date. You can treat the day you apply in writing for your mortgage as the date you take it out. However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application.

Cost of home or improvements. To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home.

The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits.

Substantial improvement. An improvement is substantial if it:

• Adds to the value of your home,

• Prolongs your home's useful life, or

• Adapts your home to new uses.

Repairs that maintain your home in good condition, such as repainting your home, aren't substantial

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improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.

Acquiring an interest in a home because of a di- vorce. If you incur debt to acquire the interest of a spouse or former spouse in a home because of a divorce or legal separation, you can treat that debt as home acquisition debt.

Part of home not a qualified home. To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that isn't a qualified home. See Divided use of your home under Qualified Home in Part I, earlier.

If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. How you used the proceeds doesn't matter.

Grandfathered debt isn't limited. All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. However, the amount of your grandfathered debt reduces the limit for home acquisition debt.

Refinanced grandfathered debt. If you refinanced grandfathered debt after October 13, 1987, for an amount that wasn't more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. To the extent the new debt is more than that mortgage principal, it is treated as home acquisition debt (so long as the proceeds were used to buy, build, or substantially improve the home), and the mortgage is a mixed-use mortgage (dis

cussed later under Average Mortgage Balance in the Ta- ble 1 Instructions ). The debt must be secured by the qualified home.

You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. After that, you treat it as home acquisition debt to the extent that it was used to buy, build, or substantially improve the home.

Exception. If the debt before refinancing was like a balloon note (the principal on the debt wasn't amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. This term can't be more than 30 years.

Example. You took out a $200,000 first mortgage on your home in 1986. The mortgage was a 10-year balloon note and the entire balance on the note was due in 1996. You refinanced the debt in 1996 with a new 30-year mortgage. The refinanced debt is treated as grandfathered debt for its entire term (30 years).

You can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations.

• All the mortgages are grandfathered debt.

• The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Ac- quisition Debt .

In either of those cases, you don't need Table 1. Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest.

Tip: Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have.

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Table 1.

Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year

See the Table 1 Instructions .