Acquisition indebtedness refers to a mortgage or loan incurred to buy, build, or substantially improve a qualified residence, and that is secured by that residence. TaxSlayer uses your answers about the loan and how the money was used to determine the amount of deductible interest.
Key Characteristics
- The debt must be used to acquire, construct, or improve the taxpayer’s principal or second home.
- The debt must be secured by the home.
- It includes refinanced debt, but only up to the amount of the original acquisition indebtedness.
- For most taxpayers, interest is deductible only on up to $750,000 of qualified home loans. If the amount exceeds the limit, the taxpayer will need to calculate the amount manually.
Examples
Example 1: Buying a Home
- You take out a $300,000 mortgage to buy your primary residence.
- This is acquisition indebtedness.
Example 2: Home Improvement
- You borrow $50,000 through a home equity loan to add a new kitchen.
- If the loan is secured by the home, it qualifies as acquisition indebtedness.
Example 3: Refinancing
- You refinance your original $300,000 mortgage with a new $350,000 loan.
- Only $300,000 is acquisition indebtedness.
- The extra $50,000 is not acquisition indebtedness unless used for qualified improvements.
Example 4: Personal Use
- You take a home equity loan to pay off credit card debt.
- This is not acquisition indebtedness.
Why It Matters
Acquisition indebtedness is crucial for determining:
- Mortgage interest deduction limits (especially post-TCJA, where limits changed).
- Whether interest on a loan is deductible on Schedule A.