Acquisition debt is a term used primarily in real estate and tax law to describe the portion of a mortgage loan taken out specifically to buy, construct, or significantly improve a qualified residence — either your primary home or a second home. This classification is important because the interest on acquisition debt qualifies for a mortgage interest deduction on your federal tax return, reducing your taxable income within specified IRS limits.
How Acquisition Debt Works for Tax Purposes
Only interest on acquisition debt is deductible under IRS rules outlined in IRS Publication 936, provided the debt is secured by your qualified home. Acquisition debt does not include all mortgage-related loans; for example, money borrowed using your home as collateral but used for purposes other than buying or improving the home is considered home equity debt, which post-2017 Tax Cuts and Jobs Act (TCJA) generally does not qualify for interest deduction.
As of the 2025 tax year, the IRS limits deductible acquisition debt to $750,000 for debts incurred after December 15, 2017. For mortgages established before that date, the limit is $1 million. These caps are combined limits that apply to the total acquisition debt on both your primary and second homes.
Acquisition Debt vs. Home Equity Debt
Understanding the difference between acquisition debt and home equity debt is crucial for maximizing your tax benefits:
- Acquisition Debt: Loans used to buy, build, or substantially improve your home, eligible for mortgage interest deduction within IRS limits.
- Home Equity Debt: Loans secured by your home but used for other purposes such as paying off credit cards or personal expenses. Interest on this debt is generally non-deductible unless it meets specific criteria.
Impact of Refinancing on Acquisition Debt
When refinancing, the portion of the new loan used to improve your home continues to be considered acquisition debt. However, any amount used for other financial needs is considered home equity debt—the distinction affects how much mortgage interest can be deducted. Keep detailed records showing how loan proceeds are used to ensure accurate deductions.
Who Should Care About Acquisition Debt?
Homeowners who itemize deductions should pay attention to acquisition debt rules, especially:
- First-time and repeat homebuyers
- Homeowners refinancing mortgages
- Owners of second homes
- Tax professionals advising clients with mortgage loans
Common Mistakes to Avoid
Some common errors include confusing acquisition debt with other secured loans, ignoring IRS limits, failing to track the use of loan proceeds during refinancing, and neglecting to update records after home improvements.
Tips for Managing Acquisition Debt Efficiently
- Maintain clear records of loan amounts and their specific uses.
- Plan borrowing strategies around IRS limits ($750,000 / $1 million).
- Consult tax professionals for complex refinancing or renovation scenarios.
- Understand timing nuances related to the December 15, 2017 cutoff.
Frequently Asked Questions
Q: Can I deduct interest on a loan used to repair my roof?
A: Yes, if the repair significantly improves your home, the loan portion can qualify as acquisition debt.
**Q: Does acquisition debt apply to second homes?
**A: Yes, acquisition debt rules and limits apply to loans on both your primary and one second home.
Q: How does refinancing affect my acquisition debt deductions?
A: It depends on whether the refinanced amount is used to improve your home or other financial purposes. Only the portion used for improvements counts as acquisition debt.
Summary Table: Acquisition Debt vs. Home Equity Debt
| Debt Type | Purpose | Mortgage Interest Deductible? | IRS Limit |
|---|---|---|---|
| Acquisition Debt | Buy, build, or improve home | Yes, up to $750,000/$1 million limit | $750,000 (post-2017 loans); $1 million (pre-2017 loans) |
| Home Equity Debt | Other uses secured by home | Generally no (post-TCJA) | N/A |
For more detailed information, visit FinHelp’s articles on Home Mortgage Interest Deduction and Mortgage Refinance. You can also review authoritative IRS guidance at IRS Publication 936 (https://www.irs.gov/publications/p936) for the latest rules on mortgage interest deductions.
Understanding acquisition debt and its tax implications helps homeowners optimize deductions and avoid costly mistakes when managing home financing and tax filing.
