Deductions and Credits · Itemized deductions and QBI

Interest expense

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

Personal interest is not deductible; everything on this topic is an exception to that. Two of the exceptions changed direction in 2025. The disallowance of home equity interest, due to lapse at the end of 2025, was made permanent. And mortgage insurance premiums, which stopped being treated as interest after 2021, were brought back — so a preparer who learned the rule in 2023 has it wrong in both places. A third exception is entirely new: interest on a car loan.

The rule

The default is disallowance. For a taxpayer other than a corporation, no deduction is allowed for personal interest (IRC § 163(h)(1)). Personal interest means any otherwise deductible interest other than: trade or business interest (not services as an employee); investment interest within § 163(d); interest taken into account in computing passive activity income or loss; qualified residence interest; certain deferred estate tax interest; interest on education loans; and qualified passenger vehicle loan interest (IRC § 163(h)(2)).

Qualified residence interest is interest on two things. Interest paid on acquisition indebtedness with respect to a qualified residence, or on home equity indebtedness with respect to one (IRC § 163(h)(3)(A)) — with the second of those switched off, as below.

A qualified residence is two homes, not three. The taxpayer’s principal residence within § 121, and one other residence selected for the year and used as a residence within § 280A(d)(1) (IRC § 163(h)(4)(A)(i)). Where a married couple file separately they are treated as one taxpayer, and each may take one residence into account unless both consent in writing to one of them taking both (§ 163(h)(4)(A)(ii)).

Acquisition indebtedness, and its cap. Debt incurred in acquiring, constructing or substantially improving a qualified residence and secured by it, including a refinancing to the extent it does not exceed the refinanced amount (IRC § 163(h)(3)(B)(i)). The cap printed in § 163(h)(3)(B)(ii) is replaced by a lower figure for taxable years beginning after 2017 (§ 163(h)(3)(F)(i)(II)), but debt incurred on or before 15 December 2017 stays on the higher limit and reduces the lower one for later borrowing (§ 163(h)(3)(F)(i)(IV)), with a binding contract exception (subclause (V)).

Home equity interest is gone, permanently. Subparagraph (A)(ii) does not apply for taxable years beginning after 31 December 2017 (IRC § 163(h)(3)(F)(i)(I)), and Pub. L. 119-21 § 70108(a)(1)(A) struck the closing date from the introductory text. Note the consequence: borrowing secured by a home to improve it is acquisition indebtedness and deductible; borrowing secured by the same home for anything else is not, however the loan is labelled.

Mortgage insurance premiums are interest again. Premiums for qualified mortgage insurance in connection with acquisition indebtedness are treated as qualified residence interest (IRC § 163(h)(3)(E)(i)), subject to a phaseout on adjusted gross income (clause (ii)) and to contracts issued after 2006 (clause (iii)). Clause (iv) terminated the treatment for amounts paid after 2021 — and § 163(h)(3)(F)(i)(III), added by Pub. L. 119-21 § 70108(a)(1)(B), disapplies clause (iv). The treatment is restored.

Car loan interest is a new exception. For taxable years beginning after 2024 and before 2029, personal interest does not include qualified passenger vehicle loan interest — interest on debt incurred after 31 December 2024 to purchase an applicable passenger vehicle for personal use, secured by a first lien on it (IRC § 163(h)(4)(A), (B)(i)). It is capped and phased out (§ 163(h)(4)(C)), excludes fleet, commercial, lease, salvage and scrap financing (§ 163(h)(4)(B)(ii)), and requires the vehicle identification number on the return (§ 163(h)(4)(B)(iii)).

Investment interest is limited to investment income. Investment interest — interest on debt properly allocable to property held for investment, excluding qualified residence interest and passive activity interest (IRC § 163(d)(3)) — is deductible only up to net investment income for the year, with the excess carried forward indefinitely (§ 163(d)(1), (2)).

Current figures

Item	2026
The default	no deduction for personal interest — defined as any otherwise deductible interest other than trade or business interest, investment interest, passive activity interest, qualified residence interest, deferred estate tax interest, education loan interest and qualified passenger vehicle loan interest^TY2026
Qualified residence	the taxpayer's principal residence within IRC § 121 and one other residence selected for the year and used as a residence within § 280A(d)(1) — a third home never qualifies^TY2026
Acquisition indebtedness	debt incurred in acquiring, constructing or substantially improving a qualified residence and secured by it, including a refinancing to the extent it does not exceed the refinanced amount^TY2026
The cap and grandfathering	$750,000, or $375,000 for a married individual filing separately, substituted for the $1,000,000 and $500,000 figures in the statute — with debt incurred on or before 15 December 2017 kept on the higher limit and reducing the lower one^TY2026
Home equity indebtedness	no deduction — IRC § 163(h)(3)(A)(ii) is disapplied for taxable years beginning after 2017, and Pub. L. 119-21 § 70108(a)(1)(A) struck the end date, so the disallowance is now permanent^TY2026
Mortgage insurance premiums	premiums for qualified mortgage insurance in connection with acquisition indebtedness are treated as qualified residence interest again — Pub. L. 119-21 § 70108(a)(1)(B) disapplies the § 163(h)(3)(E)(iv) termination that had ended the treatment after 2021^TY2026
Their phaseout	reduced by 10 percent for each $1,000, or $500 for a married individual filing separately, or fraction thereof by which adjusted gross income exceeds $100,000, or $50,000 filing separately^TY2026
Passenger vehicle loan interest	for taxable years beginning after 2024 and before 2029, interest on debt incurred after 31 December 2024 to purchase an applicable passenger vehicle for personal use, secured by a first lien on it, is not personal interest — the vehicle identification number must be on the return^TY2026
Its limits	capped at $10,000 of interest, reduced by $200 for each $1,000 or fraction of modified adjusted gross income above $100,000, or $200,000 on a joint return — and excluding fleet, commercial, lease, salvage and scrap financing^TY2026
Investment interest	interest on debt properly allocable to property held for investment, excluding qualified residence interest and interest taken into account in computing income or loss from a passive activity^TY2026
Investment interest limitation	still allowed, but limited to net investment income for the year, with the disallowed amount treated as investment interest paid in the succeeding year^TY2026

How it works in practice

Trace the borrowing, not the security. Whether interest is deductible turns on what the money was used for, with one important exception: acquisition indebtedness must also be secured by the residence. A home equity line used to build an extension is acquisition indebtedness and deductible; the same line used to buy a car is neither qualified residence interest nor — because it is not secured by a first lien on the vehicle — qualified passenger vehicle loan interest. It is simply personal interest.

Check the December 2017 line on every mortgage. Debt incurred on or before 15 December 2017 keeps the higher cap, and mixed borrowing needs both figures: the grandfathered balance reduces the lower cap available for later debt. A refinancing of grandfathered debt keeps its date under § 163(h)(3)(F)(ii)(I), but only up to the refinanced amount and only within the term limits in subclause (II).

For 2026 specifically, revisit two items on every return: mortgage insurance premiums, which were not deductible for 2022 through 2025 and now are, subject to the adjusted gross income phaseout; and car loan interest, which requires a first lien, a personal-use vehicle, post-2024 debt, and the vehicle identification number on the return. Both are easy to miss precisely because they were not there last year.

Investment interest is a separate computation and survives the § 67 suspension untouched — it is not a miscellaneous itemized deduction. Where the limitation bites, consider the election to treat qualified dividends and net capital gain as investment income, which raises the ceiling at the cost of the preferential rate on the amount elected.

Scenario 1 — the third home

Yusra owns her main home, a lake cottage and a ski condominium, each with a mortgage.

Interest on two of them is deductible. IRC § 163(h)(4)(A)(i) defines a qualified residence as the principal residence plus one other residence selected for the taxable year, so she chooses between the cottage and the condominium each year — and the interest on the third is personal interest, disallowed by § 163(h)(1). The selection is annual, so she can pick whichever produces the larger deduction, but never both.

Scenario 2 — two mortgages, two caps

Zane has an 800,000-dollar mortgage taken out in 2015 on his principal residence, and in 2026 he borrows a further 300,000 dollars secured by the same house to build an extension.

The 2015 debt is grandfathered by IRC § 163(h)(3)(F)(i)(IV) and sits under the higher pre-2018 cap. The 2026 borrowing is acquisition indebtedness because it substantially improves the residence and is secured by it — but the lower cap applicable to it is reduced by the grandfathered balance, which already exceeds it. No interest on the new 300,000 dollars is deductible. Had the 2015 loan been smaller, part of the new borrowing would have fitted.

Scenario 3 — the car loan that did not qualify

Ama draws 45,000 dollars on the home equity line secured by her house and buys a car for personal use in 2026.

Nothing is deductible. It is not qualified residence interest, because § 163(h)(3)(F)(i)(I) disapplies home equity indebtedness permanently and the borrowing did not acquire, construct or substantially improve the residence. And it is not qualified passenger vehicle loan interest, because § 163(h)(4)(B)(i) requires the debt to be secured by a first lien on the vehicle — hers is secured by the house. Borrowing directly against the car, and putting the vehicle identification number on the return, would have brought her within the new provision.

Two residences, chosen annually. A third home never qualifies, and the choice between the second and third is made each year.

Acquisition indebtedness needs both limbs — the right use and security on the residence.

The home equity disallowance is now permanent. Pub. L. 119-21 § 70108(a)(1)(A) removed the 2026 end date.

Mortgage insurance premiums were out for four years and are back. A return prepared on 2023 knowledge will omit them.

How this has changed

Pub. L. 119-21 § 70108 made three changes in one place. Subsection (a)(1)(A) struck ”, and before January 1, 2026” from § 163(h)(3)(F)(i), making the whole package permanent — the lower acquisition indebtedness cap and the home equity disallowance alike. Subsection (a)(1)(B) added subclause (III), disapplying the mortgage insurance premium termination and restoring that deduction. And (a)(3) updated the subparagraph heading from “2018 through 2025” to “beginning after 2017”. Note the contrast with § 164, where the heading was not updated — the same Act fixed one heading and left the other stale.

One clause was deleted rather than amended. Former § 163(h)(3)(F)(ii) provided that from 2026 the acquisition indebtedness cap would apply to the aggregate debt without regard to when it was incurred — that is, the grandfathering was due to end. Pub. L. 119-21 § 70108(a)(2) struck it. Pre-2018 debt therefore keeps the higher limit indefinitely, and material describing grandfathering as ending in 2026 is wrong.

Car loan interest is genuinely new and unlike anything else in § 163(h). It is a personal-interest carve-out for a consumer purchase, time-limited to 2025 through 2028, with a reporting requirement — the vehicle identification number — of a kind more usually found in the credit provisions.

Investment interest has been stable and its value rose by accident. Section 163(d) did not change, but § 67(h)‘s disallowance of miscellaneous itemized deductions removed the deductions that used to reduce net investment income under § 163(d)(4)(C). With fewer investment expenses allowed, net investment income is larger and more investment interest gets through.

Exam focus

Expect three residences, testing the two-residence rule and the annual selection.

Expect a pre-2018 mortgage with later borrowing, testing whether the grandfathered balance reduces the current cap.

Expect a home equity loan used for something other than the home. It is not deductible, and the answer does not depend on the amount.

Expect the two 2026 changes — mortgage insurance premiums restored, and car loan interest — either as the answer or as a distractor drawn from the old rule.

Check yourself

1. A taxpayer owns three homes with mortgages on each. How many produce deductible interest?

Answer: Two. IRC § 163(h)(4)(A)(i) limits a qualified residence to the principal residence and one other residence selected for the taxable year.

2. A taxpayer takes a home equity loan in 2026 and uses it to consolidate credit card debt. Is the interest deductible?

Answer: No. IRC § 163(h)(3)(F)(i)(I) disapplies home equity indebtedness, permanently since Pub. L. 119-21 § 70108(a)(1)(A), and the borrowing did not acquire, construct or substantially improve the residence so it is not acquisition indebtedness either.

3. Are mortgage insurance premiums treated as interest for 2026?

Answer: Yes. IRC § 163(h)(3)(E)(i) treats them as qualified residence interest, and § 163(h)(3)(F)(i)(III) — added by Pub. L. 119-21 § 70108(a)(1)(B) — disapplies the clause (iv) termination that had ended the treatment for amounts paid after 2021. The § 163(h)(3)(E)(ii) phaseout applies.

4. A taxpayer buys a car in 2026 with a loan secured by a first lien on the vehicle. What must appear on the return?

Answer: The vehicle identification number. IRC § 163(h)(4)(B)(iii) provides that interest is not treated as qualified passenger vehicle loan interest unless the taxpayer includes it.

5. Investment interest exceeds net investment income for the year. What happens to the excess?

Answer: It is treated as investment interest paid or accrued in the succeeding taxable year under IRC § 163(d)(2), carried forward indefinitely.

Change log

2026-08-19Initial draft. Sets out the IRC § 163(h)(1) disallowance of personal interest and the six categories that escape it, the § 163(h)(4)(A) two-residence rule, the § 163(h)(3)(F) acquisition indebtedness cap and grandfathering, the permanent disallowance of home equity interest and the restoration of mortgage insurance premiums by Pub. L. 119-21 § 70108, the new § 163(h)(4) passenger vehicle loan interest deduction, and the § 163(d) investment interest limitation.