Deducting Home Mortgage Interest: Big Beautiful Bill Update

What changed under the OBBBA?

The OBBBA of 2025 made several provisions permanent regarding mortgage interest deductions under IRC Section 163(h)(3):

• Mortgage debt limits: The $750,000 limit ($375,000 if married filing separately) for qualifying acquisition debt incurred after December 15, 2017, became permanent. The higher $1 million limit ($500,000 if married filing separately) generally continues to apply to qualifying debt incurred on or before that date. These are combined limits for your main and second home, not separate limits for each property.
• Mortgage insurance premiums: Beginning in 2026, qualifying mortgage insurance premiums are deductible again as an itemized deduction, subject to income and other eligibility limits.
• HELOCs: The disallowance of a home equity interest deduction for personal-use purchases also became permanent. Before the TCJA changes took effect in 2018, interest on certain home equity debt could qualify even when the proceeds were used for personal purchases. To qualify as home acquisition debt today, the proceeds must be used to buy, build, or substantially improve the home securing the loan, subject to the applicable debt limits.

New limitation on itemized deductions: Beginning in 2026, IRC Section 68 reduces otherwise allowable itemized deductions by 2/37 of the lesser of:

1. The amount of those itemized deductions; or
2. The amount by which taxable income, calculated before this limitation and increased by those itemized deductions, exceeds the dollar threshold where the 37% tax bracket begins.

This generally limits the federal tax benefit of affected deductions to 35%, rather than 37%.

Election for a Home Equity Line of Credit (HELOC Election)

Mortgage interest can generally still be deducted on up to two qualifying homes, subject to the combined loan limits. However, under Treasury Regulation Section 1.163-10T(o)(5), an election can be made to treat debt as not secured by a qualified residence for purposes of the qualified residence interest rules.

For example, if a HELOC is used to purchase or substantially improve a rental property, or for business use, interest tracing may support a deduction on the corresponding Schedule E or Schedule C. Investment use may qualify under the investment interest rules. The election does not automatically make the interest deductible: the use of the proceeds and the rules for that activity still control. Using the funds for another personal residence does not, by itself, qualify.

This election continues for subsequent tax years unless revoked with IRS consent, so it should be reviewed carefully before making it.

Secondary property when filing married separately

If spouses file separately and own more than one home, each spouse can generally take only one home into account as a qualified residence. However, if both spouses consent in writing, one spouse can take both the principal residence and one other residence into account, subject to the applicable debt limits.

Interest tracing

Under Treasury Regulation Section 1.163-8T, interest expense is generally allocated based on how the loan proceeds are spent. The use can typically be broken down into business, passive activity, investment, or personal expenditures.

This generally means keeping a clear trail from the loan to the expense. Placing the proceeds in a separate business, rental property, or brokerage account can make this easier to document. Using a personal account does not automatically prevent a deduction, but mixing funds can make tracing more complicated.

The regulation also includes a 15-day allocation rule for certain expenditures after borrowed funds are deposited. This is not a general safe harbor for using the wrong account. Otherwise, the account-ordering rules generally treat borrowed funds as spent before unborrowed funds, with earlier borrowings used before later borrowings, subject to the applicable exceptions.

Who can deduct the interest?

What about a house where a number of people live together? What about a property where you are not on the deed but are paying all or part of the mortgage?

A taxpayer may be able to deduct mortgage interest without holding legal title if they are treated as an equitable or beneficial owner under applicable state law and actually pay the interest. Simply living in the property or helping with the mortgage payments is not enough on its own.

The factors considered in determining equitable or beneficial ownership include whether the taxpayer:

1. Has the right to possess the property and enjoy its use, rents, or profits.
2. Has a duty to maintain the property.
3. Is responsible for insuring the property.
4. Bears the risk of loss on the property.
5. Is obligated to pay the property’s taxes, assessments, or other charges.
6. Has the right to improve the property without the legal owner’s consent.
7. Has the right to obtain legal title by paying the remaining purchase price.

These factors are considered together based on the facts and circumstances. Meeting only the first and fourth factors is not an automatic qualification, and the other mortgage interest requirements still apply.

Key court cases to consider

McNamara v. Commissioner, T.C. Summary Opinion 2023-22: A couple owned two properties and sold one in May. They calculated the average mortgage balance for that property using a 12-month period instead of the five months during which it secured the loan. The court rejected that calculation, which reduced their allowable interest deduction. This summary opinion cannot be treated as precedent for other cases.

Milkovich v. United States, 28 F.4th 1 (9th Cir. 2022): After a bankruptcy discharge, the taxpayers’ home was sold in a short sale. The lender received $522,015 and applied $114,688 to accumulated unpaid interest, with the remainder applied to principal. The Ninth Circuit held that the taxpayers could deduct the interest on the facts alleged and reversed the dismissal of their refund lawsuit. The result involved the treatment of the nonrecourse debt and the payment of interest through the sale proceeds, rather than simply how the bank reported the amount.

McCarthy v. Commissioner, T.C. Memo. 2020-74: McCarthy claimed mortgage interest deductions for two properties while filing married separately. The court found several problems, including no written spousal consent to take two residences into account, failure to establish qualified residence use, failure to establish properly secured debt on the California property, and failure to prove actual interest payment on that debt.

For a second home rented to others, personal use generally must exceed the greater of 14 days or 10% of the days rented at fair rental value. A second home not held out for rent or resale generally does not have a minimum personal-use requirement.

Planning around your mortgage interest deduction

For more information and for planning around mortgage interest deductions, please schedule a call with our office for a preliminary planning consult.