Definition
Mortgage debt used to acquire, construct, or substantially improve a home, on which interest is deductible under IRC Section 163, subject to caps limiting total deductible acquisition indebtedness to $750,000.
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Acquisition indebtedness is the mortgage debt incurred to buy or build your home. Interest on acquisition indebtedness is deductible on Schedule A (if you itemize). The cap is $750,000 in acquisition indebtedness (down from $1 million pre-2017). If your mortgage exceeds $750,000, only interest on the first $750,000 is deductible. This matters for high-value properties. Refinance loans are treated as acquisition indebtedness only to the extent they refinance original acquisition debt (not cash-out refinances). Home equity debt has separate rules (see home equity debt). Acquisition indebtedness must be secured by your primary residence or second home. Interest on unsecured loans or loans for purposes other than home acquisition/improvement isn't deductible. Understanding acquisition indebtedness is important for large mortgages and in tax planning for high-income earners.
Pro Tip
For high-value properties, understand acquisition indebtedness limits. Mortgage interest above $750,000 in acquisition debt isn't deductible, affecting the true cost of large mortgages.
Example
A homeowner buys a $1 million house with a $800,000 mortgage. Interest is deductible on the full $800,000 (under the $750,000 cap). If the mortgage were $1 million, only interest on $750,000 would be deductible.