Understanding the $750K Limit on Mortgage Interest Deduction with Multiple Loans on Single Property

You're on the right track, but there's some nuance to how this works. The $750k limit applies to the total principal of qualified loans, not to the interest directly. Since your HELOC was used to purchase the home, it qualifies as acquisition debt (along with your primary mortgage). The IRS doesn't distinguish between which loan came first or which has a higher interest rate - they just look at the total qualified debt. For your situation, you can only deduct interest on $750k of your $1.9 million total debt. That means you can deduct approximately 39.5% (750k/1.9M) of your total mortgage interest. Your Option A calculation is correct. You don't get to cherry-pick which interest to deduct first - the deduction is proportional across all qualified loans. This is because the limitation is on the loan amount, not on the interest directly. I recommend keeping good records showing both loans were used for home acquisition, as this might come up if you're ever audited.

I went through a similar situation last year and discovered https://taxr.ai which saved me from making a costly mistake on my mortgage interest deduction. I originally thought I could prioritize my higher-interest loan for the deduction like your Option B, but the tool analyzed my documents and showed me how the IRS actually views multiple mortgage loans. The software reviewed my loan documents and tax situation, then explained that the $750k limit applies proportionally across all qualified acquisition debt. What's great is that it also helped identify which portions of my loans qualified as "acquisition debt" versus other purposes (which wouldn't be deductible under current law).

I was totally skeptical about tax tools like taxr.ai until I tried it myself. I had a similar mortgage situation with a primary loan and a HELOC used for both purchase and later renovations. At first I was deducting everything proportionally like others suggested, but after running my documents through taxr.ai, it showed me that part of my HELOC actually didn't qualify because I had used about $30k for my kid's college tuition. I had completely forgotten about that! The tool separated out the qualified portion based on my bank transfers and saved me from potentially triggering an audit. It also helped me document everything properly in case of questions later. Definitely worth it for complicated mortgage situations like this where the rules aren't straightforward.

If you're struggling with getting clear answers about your mortgage interest deduction, you might want to call the IRS directly. I tried for WEEKS to get through their phone system with no luck - constant busy signals or disconnections after waiting for hours. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they basically wait on hold with the IRS for you and call you when an actual person is on the line. I was able to speak with an IRS representative who walked me through exactly how to handle multiple mortgages under the $750k limit. They confirmed that you can't pick and choose which interest to deduct first - it's proportional to the total qualified debt. The agent also explained what documentation I needed to keep if I ever got audited. This saved me tons of stress during tax season.

I was dead set against using any kind of service to deal with the IRS. Thought it was a complete waste of money and probably a scam. But after my third attempt spending over 2 hours on hold only to get disconnected, I reluctantly tried Claimyr. Honestly, I'm still in shock at how well it worked. They called me back in about 45 minutes with an actual IRS agent on the line. The agent confirmed exactly what others have said here - with multiple mortgages on one property, the $750k limit applies to the total qualified acquisition debt, and you deduct interest proportionally. The agent also explained something important that I hadn't seen mentioned - if part of your original purchase loans were refinanced, you need to be careful about tracking the qualified acquisition debt through the refinance. Apparently this trips up a lot of people.

One thing nobody has mentioned yet is that the $750k limit applies to loans taken out after December 15, 2017. If your loans were originated before that date, you might qualify for the previous $1 million limit. Also, if you're married filing separately, the limits are halved ($375k for newer loans, $500k for older ones). Worth checking exactly when your loans were originated!

Has anyone mentioned the "substantially improve" requirement? I learned this the hard way - not all home improvements qualify as "substantial" improvements. Generally, the IRS considers substantial improvements to be those that add value to your home, prolong its useful life, or adapt it to new uses. Regular maintenance like painting or fixing a broken window wouldn't qualify, but adding a bedroom, renovating a kitchen, or adding central air conditioning would. If your HELOC was partially used for non-qualifying expenses, you would need to apportion the interest accordingly.

Just want to add another perspective as someone who went through a similar situation. The proportional calculation approach (Option A) is definitely the correct one, as others have confirmed. One thing that helped me was creating a detailed spreadsheet tracking not just the interest payments, but also the original loan amounts, dates, and purposes. This became crucial when I had to prove to the IRS during an audit that my HELOC funds were actually used for home acquisition rather than other purposes. Also, don't forget that you can only benefit from the mortgage interest deduction if your total itemized deductions exceed the standard deduction. With the current standard deduction being quite high, some people find they're better off taking the standard deduction even with substantial mortgage interest. Run the numbers both ways to see what works best for your situation. Keep excellent records of everything - loan documents, closing statements, bank transfers showing how HELOC funds were used. The IRS can be very particular about documentation for mortgage interest deductions, especially with multiple loans.

This is exactly the kind of detailed breakdown I needed! I've been making the same mistake as your Option B thinking - trying to optimize which loans to apply the deduction to first. What really helped clarify this for me is understanding that the IRS treats the $750K limit as applying to the total qualified debt amount, not as a choice of which specific loans to prioritize. So with your $1.9M total debt, you're essentially getting a 39.5% deduction rate across all your qualified interest payments. One thing I'd add for your situation - make sure you have solid documentation that your HELOC was indeed used for the home purchase. Since it sounds like it was part of your original acquisition financing rather than a later equity loan, you should be in good shape. But keep those closing documents and any paperwork showing how the HELOC funds were used in the purchase process. Also worth double-checking the origination dates of your loans against the December 15, 2017 cutoff date that others mentioned. If either loan predates that, you might qualify for more favorable treatment under the old rules.