The $750,000 Mortgage Limit: Tax Strategy for High-Value Homeowners
The $750,000 Mortgage Limit: Tax Strategy for High-Value Homeowners
COACHING POINTS
- The Limit: Under current law (TCJA, through 2025), interest on Home Acquisition Debt is deductible only up to a principal limit of $750,000 ($375,000 MFS). Interest on debt above this threshold is not deductible.
- Acquisition Debt Definition: This includes the original mortgage used to buy/build a qualified home plus debt used to buy, build, or substantially improve that same home.
- The Strategy: For high-value homeowners, the real metric is the “non-deductible principal slice”. That slice permanently converts part of your mortgage interest into after-tax cost.
The $750,000 cap is a critical constraint in high-cost housing markets. The planning game is not “Is my interest deductible?”
It is “What portion of my balance produces zero tax benefit, and what is the annual after-tax drag?”
Source: IRS Publication 936 (Home Mortgage Interest Deduction)
Scenario: Married Filing Jointly couple buys a $1.5M home with a $1.2M mortgage.
- Deductible Principal Limit: $750,000.
- Non-Deductible Principal: $1,200,000 − $750,000 = $450,000.
- Interest Cost (Year 1 example): At 6.5%, total interest ≈ $78,000.
- Deduction Lost (conceptual): The interest attributable to that $450,000 slice receives no Schedule A benefit (post-2018 acquisition debt rules).
What-If Scenario: Including Home Improvement Debt
Goal: maximize deductible acquisition characterization while staying inside the cap.
| Debt Component | Amount ($) | Deductible Status |
|---|---|---|
| Original Mortgage (Pre-2018) | 900000 | Potentially subject to grandfathered rules (legacy $1M cap), depending on facts. |
| Original Mortgage (Post-2018) | 900000 | Acquisition interest is limited to the $750k cap; the slice above the cap yields no benefit. |
| Post-2018 Debt + Improvement Spend (Tracked) | 750000 + improvement spend | Improvement spending can qualify as acquisition debt only if funds are traced to capital improvements and total acquisition debt remains within the cap. |
Verdict: classification and tracing matter. The IRS cares about use of proceeds and acquisition vs. non-acquisition characterization, not your intent.
Visualizing the Only Number That Matters: Non-Deductible Principal
| MortgageBalance | NonDeductiblePrincipal |
|---|---|
| 500000 | 0 |
| 750000 | 0 |
| 1000000 | 250000 |
| 1200000 | 450000 |
*X-axis must be numeric for a true line chart. If your renderer still shows bars, it is falling back to a column chart (engine limitation).
Execution Protocol
If you have a pre-2018 mortgage potentially under legacy rules, refinancing can change how the limit applies depending on facts.
Don’t refinance a large legacy balance without a tax review.
If you use a HELOC or cash-out refi for improvements, keep a clean trail (separate account, invoices, contracts).
If proceeds mingle with personal funds, you lose the ability to prove “acquisition/improvement use.”
The cap applies across your main home and one other qualified residence. Combine acquisition debt when testing the cap.
COACHING DIRECTIVE
- Do This: If you’re near/above $750k, treat “non-deductible principal” as a measurable drag and design debt + improvement spending with documentation from day one.
- Avoid This: Assuming “mortgage interest is always deductible.” It is not—especially for high balances and non-acquisition use.
Frequently Asked Questions
What is “grandfathered debt”?
Debt originated on or before December 15, 2017 may be subject to legacy limitations under prior-law rules depending on specifics. The operational lesson: legacy loans require extra caution before refinancing.
Does this matter if I take the standard deduction?
This only matters if you itemize (Schedule A). If you claim the standard deduction, you are not receiving a mortgage-interest benefit anyway.
Is the $750k cap permanent?
Current TCJA-related constraints are scheduled to change after 2025 unless extended/modified by Congress. Plan using current law, but don’t lock long-term decisions without checking the then-current rules.