A qualifying “home acquisition loan” is a loan used to buy, build, or substantially improve your principal residence or second home, provided the debt is secured by that same residence. Interest paid on such home acquisition loans is fully deductible if the total debt does not exceed $1,000,000, or $500,000 if you are married filing separately. See 15.1 for the two-residence limit.
The $1,000,000 (or $500,000) limit applies to acquisition loans taken out after October 13, 1987. If you incurred substantial loans before October 14, 1987, and plan to purchase a new home, your deduction for the mortgage for the new home may be limited. The $1 million limit for acquisition debt after October 13, 1987, is reduced by the amount of outstanding pre–October 14, 1987, debt. Although interest on a pre–October 14, 1987, debt is generally fully deductible regardless of the size of the loan, refinancing a pre–October 14, 1987, debt for more than the existing balance subjects the excess to the $1 million ceiling (15.7).