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IRS.gov Website
Publication 936
taxmap/pubs/p936-001.htm#en_us_publink1000229991

Part II. Limits on Home Mortgage Interest Deduction(p9)

rule
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.
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Home Acquisition Debt(p9)

rule
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 also must 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.
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Home acquisition debt limit.(p9)

rule
The total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main home and second home is limited based on when the debt is secured. The limits above are reduced (but not below zero) by the amount of your grandfathered debt (discussed later).
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Refinanced home acquisition debt.(p9)

rule
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.
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Mortgage that qualifies later.(p9)

rule
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.
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Mortgage treated as used to buy, build, or substantially improve home.(p9)

rule
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.)
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Example 1.(p9)

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.
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Example 2.(p10)

On January 31, John began building a home on the lot that he owned. He used $45,000 of his personal funds to build the home. The home was completed on October 31. On November 21, John 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.
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Date of the mortgage.(p10)
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.
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Cost of home or improvements.(p10)

rule
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.
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Substantial improvement.(p10)
An improvement is substantial if it:
Repairs that maintain your home in good condition, such as repainting your home, aren't substantial 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.
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Acquiring an interest in a home because of a divorce.(p10)
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.
taxmap/pubs/p936-001.htm#en_us_publink1000230006
Part of home not a qualified home.(p10)
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.
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Grandfathered Debt(p10)

rule
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.
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Refinanced grandfathered debt.(p10)

rule
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 (discussed later under Average Mortgage Balance in the Table 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.
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Exception.(p10)
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.
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Example.(p10)

Chester took out a $200,000 first mortgage on his home in 1986. The mortgage was a 5-year balloon note and the entire balance on the note was due in 1991. Chester refinanced the debt in 1991 with a new 30-year mortgage. The refinanced debt is treated as grandfathered debt for its entire term (30 years).
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Table 1 Instructions(p10)

rule
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. 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.
Deposit
Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have.
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PencilTable 1. Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year

See the Table 1 Instructions.
Part I    Qualified Loan Limit
1.Enter the average balance of all your grandfathered debt. See the line 1 instructions1. 
2.Enter the average balance of all your home acquisition debt incurred prior to December 16, 2017. See the line 2 instructions2. 
3.Enter $1,000,000 ($500,000 if married filing separately)3. 
4.Enter the larger of the amount on line 1 or the amount on line 34. 
5.Add the amounts on lines 1 and 2. Enter the total here5. 
6.Enter the smaller of the amount on line 4 or the amount on line 56. 
 
  • If you have no home acquisition debt incurred after December 15, 2017, or the amount on line 6 is $750,000 ($375,000 if married filing separately) or more, line 6 is your qualified loan limit. Enter this amount on line 11 and go to Part II, line 12.
  • If you have home acquisition debt incurred after December 15, 2017, go to line 7.
  
7.Enter the average balance of all your home acquisition debt incurred after December 15, 2017. See the line 7 instructions7. 
8.Enter $750,000 ($375,000 if married filing separately)8. 
9.Enter the larger of the amount on line 6 or the amount on line 89. 
10.Add the amounts on lines 6 and 7. Enter the total here10. 
11.Enter the smaller of line 9 or line 10. This is your qualified loan limit11. 
Part II    Deductible Home Mortgage Interest
12.Enter the total of the average balances of all mortgages from lines 1, 2, and 7 on all qualified homes.
See the line 12 instructions
12. 
 
  • If line 11 is less than line 12, go on to line 13.
  • If line 11 is equal to or more than line 12, stop here. All of your interest on all the mortgages included on line 12 is deductible as home mortgage interest on Schedule A (Form 1040).
  
13.Enter the total amount of interest that you paid on the loans from line 12. See the line 13 instructions13. 
14.Divide the amount on line 11 by the amount on line 12. Enter the result as a decimal amount (rounded to three places)14. ×.
15.Multiply the amount on line 13 by the decimal amount on line 14. Enter the result. This is your deductible home mortgage interest. Enter this amount on Schedule A (Form 1040) 15. 
16.Subtract the amount on line 15 from the amount on line 13. Enter the result. This isn't home mortgage interest. See the line 16 instructions 16. 
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Average Mortgage Balance(p12)

rule
You have to figure the average balance of each mortgage to determine your qualified loan limit. You need these amounts to complete lines 1, 2, 7, and 12 of Table 1. You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. The following are methods you can use to figure your average mortgage balances. However, if a mortgage has more than one category of debt, see Mixed-use mortgages, later, in this section.
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Average of first and last balance method.(p12)

rule
You can use this method if all the following apply.
Pencil
To figure your average balance, complete the following worksheet.
1.Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally, January 1)
2.Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally, December 31)
3.Add amounts on lines 1 and 2
4.Divide the amount on line 3 by 2.0. Enter the result
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Interest paid divided by interest rate method.(p12)

rule
You can use this method if at all times in 2018 the mortgage was secured by your qualified home and the interest was paid at least monthly.
Pencil
Complete the following worksheet to figure your average balance.
1.Enter the interest paid in 2018. Don't include points, mortgage insurance premiums, or any interest paid in 2018 that is for a year after 2018. However, do include interest that is for 2018 but was paid in an earlier year
2.Enter the annual interest rate on the mortgage. If the interest rate varied in 2018, use the lowest rate for the year
3.Divide the amount on line 1 by the amount on line 2. Enter the result
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Example.(p12)

Mr. Blue had a mortgage secured by his main home all year. He paid interest of $2,500 on this loan. The interest rate on the loan was 9% (0.09) all year. His average balance using this method is $27,778, figured as follows.
1.Enter the interest paid in 2018. Don’t include points, mortgage insurance premiums, or any interest paid in 2018 that is for a year after 2018. However, do include interest that is for 2018 but was paid in an earlier year $2,500
2.Enter the annual interest rate on the mortgage. If the interest rate varied in 2018, use the lowest rate for the year0.09
3.Divide the amount on line 1 by the amount on line 2. Enter the result$27,778
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Statements provided by your lender.(p12)

rule
If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home.
For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year.
If your lender can give you your average balance for the year, you can use that amount.
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Example.(p12)

Ms. Brown had a home loan secured by her main home all year. She received monthly statements showing her average balance for each month. She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12.
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Mixed-use mortgages.(p12)

rule
A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt).
Complete lines 1, 2, and 7 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt (determined by the date the debt was acquired) in your mixed-use mortgage. Don’t use the methods described earlier in this section to figure the average balance of either category. Instead, for each category, use the following method.
  1. Figure the balance of that category of debt for each month. This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order.
    1. First, any home equity debt not used to buy, build, or substantially improve the home.
    2. Next, any grandfathered debt.
    3. Finally, any home acquisition debt.
  2. Add together the monthly balances figured for b and c in (1).
Complete line 12 of Table 1 using the figure from line (2) above.
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Example 1.(p12)

In 1986, Sharon took out a first mortgage of $1,400,000. The mortgage was a 5-year balloon note and the entire balance on the note was due in 1991. She refinanced the debt in 1991 with a new 30-year mortgage (grandfathered debt). On March 2, 2018, when the home had a fair market value of $1,700,000 and she owed $500,000 on the mortgage, Sharon took out a second mortgage for $200,000. She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. During 2018, her principal payments on the second mortgage totaled $10,000.
To complete Table 1, line 7, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. The January and February balances were zero. The March through December balances were all $180,000 because none of her principal payments are applied to the home acquisition debt. (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000].) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Therefore, the average balance of the home acquisition debt for 2018 was $150,000 ($1,800,000 ÷ 12).
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Example 2.(p12)

The facts are the same as in Example 1. In 2019, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. The balance of the home acquisition debt remains $180,000 for each of those months. Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Therefore, the average balance of the home acquisition debt for 2019 is $179,750 ($2,157,000 ÷ 12).
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Line 1(p13)

rule
Figure the average balance for the current year of each mortgage you had on all qualified homes on October 13, 1987 (grandfathered debt). Add the results together and enter the total on line 1. Include the average balance for the current year for any grandfathered debt part of a mixed-use mortgage.
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Line 2(p13)

rule
Figure the average balance for the current year of each mortgage you took out on all qualified homes after October 13, 1987, and prior to December 16, 2017, to buy, build, or substantially improve the home (home acquisition debt). Add the results together and enter the total on line 2. Include the average balance for the current year for any home acquisition debt part of a mixed-use mortgage.
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Line 7(p13)

rule
Figure the average balance for the current year of each mortgage you took out on all qualified homes after December 15, 2017, to buy, build, or substantially improve the home (home acquisition debt). Add the results together and enter the total on line 7.
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Line 12(p13)

rule
Figure the average balance for the current year of each outstanding home mortgage. Add the average balances together and enter the total on line 12. See Average Mortgage Balance, earlier.
Note. If the average balance consists of more than one category of debt (grandfathered debt, home acquisition debt, and home equity debt), see Mixed-use mortgages, earlier, to figure the average mortgage balance.
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Line 13(p13)

rule
If you make payments to a financial institution, or to a person whose business is making loans, you should get Form 1098 or a similar statement from the lender. This form will show the amount of interest to enter on line 13. Also include on this line any other interest payments made on debts secured by a qualified home for which you didn't receive a Form 1098. Don't include points on this line.
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Claiming your deductible points.(p13)

rule
Figure your deductible points as follows.
  1. Figure your deductible points for the current year using the rules explained under Points in Part I, earlier.
  2. Multiply the amount in item (1) by the decimal amount on line 14. Enter the result on Schedule A (Form 1040), line 8. This amount is fully deductible.
  3. Subtract the result in item (2) from the amount in item (1). This amount isn't deductible as home mortgage interest. However, if you used any of the loan proceeds for business or investment activities, see the instructions for line 16 next.
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Line 16(p13)

rule
You can't deduct the amount of interest on line 16 as home mortgage interest. If you didn't use any of the proceeds of any mortgage included on line 12 of the worksheet for business, investment, or other deductible activities, then all the interest on line 16 is personal interest. Personal interest isn't deductible.
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Table 2. Where To Deduct Your Interest Expense

IF you have ... THEN deduct it on ... AND for more information, go to ...
deductible student loan interestSchedule 1 (Form 1040), line 33Pub. 970, Tax Benefits for Education.
deductible home mortgage interest and points reported on Form 1098Schedule A (Form 1040), line 8this publication (936).
deductible home mortgage interest not reported on Form 1098Schedule A (Form 1040), line 8this publication (936).
deductible points not reported on Form 1098Schedule A (Form 1040), line 8this publication (936).
deductible investment interest (other than incurred to produce rents or royalties)Schedule A (Form 1040), line 9Pub. 550, Investment Income and Expenses.
deductible business interest (non-farm)Schedule C or C-EZ (Form 1040)Pub. 535, Business Expenses.
deductible farm business interestSchedule F (Form 1040)Pubs. 225, Farmer's Tax Guide, and 535, Business Expenses.
deductible interest incurred to produce rents or royaltiesSchedule E (Form 1040)Pubs. 527, Residential Rental Property, and 535, Business Expenses.
personal interestnot deductible.




If you did use all or part of any mortgage proceeds for business, investment, or other deductible activities, the part of the interest on line 16 that is allocable to those activities can be deducted as business, investment, or other deductible expense, subject to any limits that apply. Table 2 shows where to deduct that interest. See Allocation of Interest in chapter 4 of Pub. 535 for an explanation of how to determine the use of loan proceeds.
The following two rules describe how to allocate the interest on line 16 to a business or investment activity.
You figure the total amount of interest otherwise allocable to each activity by multiplying the amount on line 13 by the following fraction.
 Amount on line 12
allocated to that activity
 
Total amount on line 12
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Example.(p14)

Don had two mortgages (A and B) on his main home during the entire year. Mortgage A had an average balance of $90,000, and mortgage B had an average balance of $110,000.
Don determines that the proceeds of mortgage A are allocable to personal expenses for the entire year. The proceeds of mortgage B are allocable to his business for the entire year. Don paid $14,000 of interest on mortgage A and $16,000 of interest on mortgage B. He figures the amount of home mortgage interest he can deduct by using Table 1. Don determines that $15,000 of the interest can be deducted as home mortgage interest.
The interest Don can allocate to his business is the smaller of:
  1. The amount on Table 1, line 16 of the worksheet ($15,000); or
  2. The total amount of interest allocable to the business ($16,500), figured by multiplying the amount on line 13 (the $30,000 total interest paid) by the following fraction.
 $110,000 (the average balance
of the mortgage allocated
to the business)
 
$200,000 (the total average
balance of all mortgages)
Because $15,000 is the smaller of items (1) and (2), that is the amount of interest Don can allocate to his business. He deducts this amount on his Schedule C (Form 1040).