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.