Mortgage Interest on Loans Over the Limit

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Home mortgage interest is deductible if you itemize, but only the interest on a limited amount of debt: $750,000 for loans taken out after December 15, 2017, and $1,000,000 for older loans. Above that, the lender still reports every dollar of interest on Form 1098, and the IRS still expects you to deduct only a fraction of it. The fraction is the limit divided by the average balance of your mortgages for the year, and the IRS lays out the computation in Table 1 of Publication 936. This page walks through it, explains which balance counts (not the one on the 1098), and has a calculator that produces the same answer the worksheet does.

The companion page, Mortgage interest after a refinance, covers what happens to the limit when a loan is replaced or cash is taken out, points, and mortgage insurance. This page is about one thing: a mortgage, or two of them together, that is simply bigger than the limit.

The Limits

The IRS calls it: the acquisition indebtedness limit, Section 163(h)(3)

Deductible home mortgage interest is interest on acquisition debt: a loan secured by your main home or one second home and used to buy, build or substantially improve that home. The amount of acquisition debt whose interest counts is capped:

When the loan was taken out	Limit (married filing jointly, single, head of household)	Married filing separately
After December 15, 2017	$750,000	$375,000
October 14, 1987 through December 15, 2017 (or under a written contract by December 15, 2017 to close by January 1, 2018, actually closed by April 1, 2018)	$1,000,000	$500,000
On or before October 13, 1987 (“grandfathered debt”)	No limit, but it uses up the limits above	—

Three things about the table. First, the 2025 tax law made the $750,000 limit permanent; it had been scheduled to go back to $1,000,000 for 2026. Second, a loan from before December 16, 2017 keeps its $1,000,000 limit as long as it exists, and a refinance of its remaining balance keeps it too, for the remaining term of the original loan. Third, the limit is on the combined debt on your main home and one second home together, not per house, and it is per return: an unmarried couple who each own half the house each get the full limit on their own return (Voss v. Commissioner, 9th Cir. 2015, which the IRS has accepted), while a married couple filing separately get half each.

Interest on debt over the limit is not lost by whole loans; it is lost by proportion. A $1,000,000 loan taken out in 2022 deducts 750/1000ths, or 75%, of its interest. The arithmetic is done on the average balance for the year, which is why the deductible share creeps up as the loan is paid down.

One more boundary: money borrowed against the house but not used to buy, build or improve it (a cash-out refinance that paid off cars, a HELOC that funded a business) is not acquisition debt at all. It does not go into the worksheet; its interest is simply not home mortgage interest. That split comes first; this page assumes it has already been made.

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Which Balance Counts

The IRS calls it: the average mortgage balance, Publication 936

The worksheet compares the limit to the average balance of each loan during the year, not the original amount and not the balance on any one day. Form 1098 box 2 shows the principal on January 1, which is a starting point, not the answer. The IRS allows three ways to get the average, and you can use a different one for each loan:

Method	When you may use it	How
Average of first and last balance	You borrowed nothing new on the loan during the year, prepaid no more than one month’s principal, and made level payments at least twice a year	Add the balance on January 1 (or the day the loan started) and on December 31 (or the day it was paid off), divide by 2
Interest divided by rate	The loan was secured by the home all year and interest was paid at least monthly	Divide the interest paid for the year (not points, not mortgage insurance) by the lowest interest rate in effect during the year
Lender’s statements	Always	Add the month-end balances from the statements and divide by 12 (count a month the home was not a qualified home as zero), or use the lender’s own annual average if it reports one

For a loan that started or ended during the year, use the statements method with zero for the months before or after. For a loan that is partly acquisition debt and partly not (the cash-out case), the IRS applies your payments first to the part that is not acquisition debt, which is a small favor: the non-qualified piece shrinks first.

The interest-divided-by-rate method is the one most people with a big loan should try, because an adjustable or step-rate loan uses the lowest rate of the year, which produces a higher average balance — the wrong direction. For a fixed-rate loan it gives the true average and takes thirty seconds.

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The Worksheet, Line by Line

The IRS calls it: Table 1, Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest

Part I, the qualified loan limit. Line 1: average balance of grandfathered (pre-October 14, 1987) debt. Line 2: average balance of acquisition debt from October 14, 1987 through December 15, 2017. Line 3: $1,000,000 ($500,000 married filing separately). Line 4: the larger of line 1 or line 3. Line 5: line 1 plus line 2. Line 6: the smaller of line 4 or line 5. If you have no debt from after December 15, 2017, or line 6 is already $750,000 or more, line 6 is your qualified loan limit and you skip to line 12. Line 7: average balance of acquisition debt from after December 15, 2017. Line 8: $750,000 ($375,000 married filing separately). Line 9: the larger of line 6 or line 8. Line 10: line 6 plus line 7. Line 11: the smaller of line 9 or line 10 — your qualified loan limit.

What the choreography accomplishes: old debt gets its $1,000,000 room; new debt gets $750,000; and if you have both, the new debt only adds to the limit up to whatever room the old debt left under $750,000. A 2016 loan with an $800,000 average balance has a $1,000,000 limit and uses $800,000 of it; a 2023 improvement loan on top of it adds nothing to the limit, because $800,000 already exceeds $750,000.

Part II, the deductible interest. Line 12: the total average balance of every loan on lines 1, 2 and 7. If line 11 is at least line 12, stop — all the interest is deductible. Line 13: the total interest paid on those loans. Line 14: line 11 divided by line 12, to three decimal places. Line 15: line 13 times line 14 — the deductible home mortgage interest, to Schedule A. Line 16: line 13 minus line 15 — the interest that is not home mortgage interest.

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The Calculator

The IRS calls it: lines 1 through 16, done for you

Enter the average balance and the interest paid for each kind of loan you have (leave the others blank). If you don’t know the average balance, enter the January 1 and December 31 balances and the calculator averages them, which is correct for a loan with only regular payments. The result is the same as the Publication 936 worksheet; the worksheet itself is shown so you can follow it, or hand it to us.

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Worked Examples

The IRS calls it: Table 1, filled in

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What Happens to the Rest

The IRS calls it: line 16, and the tracing rules

Usually nothing. The interest on line 16 is personal interest, and personal interest has not been deductible since 1991. The exception is when some of the mortgage money went somewhere deductible: a home office, a rental unit in the house, a business, an investment. Then the line 16 interest may be allocated to that use (Publication 936, Table 2) and deducted there — on Form 8829 for the office, Schedule E for the rental, Schedule C for the business, or as investment interest on Form 4952. The allocation follows where the dollars went, and you may choose how to allocate among several uses up to each use’s share. If the loan was spent on the house, there is nothing to allocate.

Mortgage interest on a rental property is never subject to this limit; it is a rental expense on Schedule E in full. The limit is only about the interest you deduct as a personal itemized deduction on your own home.

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What You Can Do About It

The IRS calls it: nothing; this is arithmetic you can change

• Pay it down, not off. Every dollar of principal above the limit is a dollar whose interest is costing you the full rate with no deduction. A lump-sum paydown to the limit is the only prepayment with a guaranteed after-tax return equal to the full mortgage rate. Below the limit, the deduction makes the loan cheaper and the case for paying it down weaker.
• Do not refinance a pre-2018 loan into a bigger one. The old balance keeps its $1,000,000 limit through a refinance; anything added is $750,000-limit money and the blend is computed on the whole. Refinance the balance, not more.
• Use the right average. A loan that was paid down during the year has a lower average than its January 1 balance; the interest-divided-by-rate method captures that. A HELOC that was drawn and repaid within the year has a small average even if the line is large.
• Keep improvements on the house loan and everything else off it. Interest on borrowed money that bought a car is not deductible at any loan size, and it dilutes nothing — it is simply out. Money that built the addition is acquisition debt, limited only by the cap.
• Second home within the limit, or not at all. The limit is combined. A $600,000 main home loan plus a $400,000 cabin loan is $1,000,000 against a $750,000 cap: 75% of all the interest. The cabin’s interest is not separately deductible anywhere unless it is rented enough to be a rental.
• Check whether itemizing is still worth it. With the deductible interest cut to $35,000 and the $40,400 SALT cap, most big-mortgage households in Colorado still itemize, but run the comparison; the standard deduction is $32,200 joint for 2026. Itemized vs. standard has the worksheet.

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Colorado

The IRS calls it: nothing; Colorado starts from federal taxable income

Colorado has no mortgage interest deduction of its own. It starts from federal taxable income, so the federally allowed interest is already in the number, and the federally disallowed interest is already out. Colorado does, however, cap the total itemized deductions of higher earners: for federal adjusted gross income of $400,000 or more, itemized deductions in excess of $30,000 (single) or $60,000 (joint) are added back on the Colorado return (verify current thresholds). A couple with $35,000 of allowed mortgage interest, $40,400 of taxes and $10,000 of charity is at $85,400 and adds back $25,400 in Colorado. The Colorado highlights page covers the addbacks.

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Questions we get

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What to bring

• Every Form 1098 for the year, for every loan on the main home and the second home
• The December statement for each loan, showing the year-end balance, and the January statement showing the starting balance (or the year-end statement from last year)
• The interest rate on each loan, and whether it changed during the year
• The original loan date and amount for any loan from before December 16, 2017, and the closing disclosure of any refinance since
• How any cash-out or home equity money was used
• Property tax bills, state tax paid, charitable receipts and medical expenses, so we can test itemizing

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Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Written October 26, 2026.