How to Calculate Mortgage Interest Deduction Over $750,000

If your mortgage balance is bigger than the federal cap, you cannot deduct every dollar of interest you paid. To calculate the mortgage interest deduction on a loan over $750,000, divide the applicable debt limit by your average loan balance for the year, then multiply that ratio by the total interest you paid. The applicable limit is $750,000 for mortgages taken out after December 15, 2017, and $1,000,000 for older “grandfathered” loans.¹ The One Big Beautiful Bill Act made the $750,000 cap permanent, so this proration is a fixture of the tax code going forward.²

Which Cap Applies to Your Loan

Before you touch the formula, pin down which ceiling governs your debt. The date your mortgage originated decides it.

Loans taken out after December 15, 2017: the first $750,000 of acquisition debt qualifies, or $375,000 if you file married filing separately.¹
Loans taken out on or before December 15, 2017: these grandfathered mortgages keep the pre-TCJA limit of $1,000,000, or $500,000 if married filing separately.¹

The grandfathering distinction survives the OBBBA. A mortgage that predates December 16, 2017 keeps the $1,000,000 ceiling in 2026 and beyond.³

One point that catches people with a vacation house: the limit applies to the combined balance of qualifying debt across your primary home and one second home. There is no separate cap per property.¹ A $500,000 mortgage on your main home plus a $400,000 mortgage on a second home gives you $900,000 of combined debt, which is above the $750,000 cap, and you prorate the combined interest using the combined average balance.

One boundary worth flagging. Only acquisition debt counts: money you borrowed to buy, build, or substantially improve the home that secures the loan.⁴ A home equity loan or HELOC used to pay off credit cards, fund tuition, or buy a car produces no deductible interest at all, regardless of how it’s secured. If part of your balance falls into that category, strip it out before running the proration.

Figuring Your Average Loan Balance

The proration depends on your average outstanding principal for the year, not the balance printed in Box 2 of your Form 1098. Box 2 shows the principal as of January 1 only, which is a single data point, not an average.⁵ You calculate the average yourself. The IRS allows three methods.¹

First-and-Last-Balance Method

Add your balance on January 1 to your balance on December 31 and divide by two. This shortcut only works if you didn’t borrow additional amounts during the year, didn’t prepay more than one month’s principal, and made level payments at least semi-annually. For a standard amortizing mortgage with no mid-year refinance, this is usually the simplest approach.

Interest-Divided-by-Rate Method

Take the total interest you paid during the year (excluding points and prepaid interest for future years) and divide by your annual interest rate. If the rate changed mid-year, use the lowest rate. The loan must have been secured by your qualified home with interest paid at least monthly throughout the year.

Monthly Statements Method

If your lender’s monthly statements show closing or average balances, add the twelve monthly figures and divide by twelve. This produces the most precise result when rates adjust or when extra payments create irregular paydowns. If your servicer can just hand you the average balance for the year, use that number directly.

Running the Proration

Once you have the average balance and know which cap applies, the formula is:

Deductible interest = Total interest paid × (Applicable debt limit ÷ Average outstanding balance)

The IRS worksheet in Publication 936 walks through this on lines 11 through 15. Divide the limit by the average balance, round to three decimal places, and multiply your total interest paid by that decimal.¹

Worked Example

Say you took out a mortgage in 2020. Your average outstanding balance for the year is $1,000,000, and you paid $55,000 in interest. The $750,000 cap applies.

$750,000 ÷ $1,000,000 = 0.750. Then $55,000 × 0.750 = $41,250. That’s your deductible interest. The remaining $13,750 of interest produces no tax benefit at all.

Now run the same numbers for a grandfathered loan originated in November 2017. The cap becomes $1,000,000. $1,000,000 ÷ $1,000,000 = 1.000, and the full $55,000 is deductible. The grandfathering is worth real money.

The ratio shifts each year as you pay down principal. Once your average balance drops below the applicable cap, the ratio hits 1.000 and the proration disappears. On a $750,000 post-2017 mortgage at typical 30-year rates, that moment can be a decade or more away.

Refinancing Without Losing the Higher Limit

Refinancing a grandfathered mortgage preserves the $1,000,000 limit, but only up to the principal balance of the old loan immediately before the refinance.¹ Refinanced debt is treated as incurred on the original mortgage’s origination date for purposes of which cap applies.³

Borrow more than the old balance and you create two buckets of debt inside a single loan. Suppose you refinance a grandfathered mortgage with $600,000 remaining into a new $750,000 loan. The first $600,000 keeps the $1,000,000 cap. The additional $150,000 is new debt subject to the $750,000 cap. Your proration math has to account for both buckets separately.

Cash-out proceeds only qualify as acquisition debt if you spend them on substantial improvements to the home securing the loan. Repainting a room or fixing a leaky faucet is maintenance and does not count; building a deck, finishing a basement, or replacing a roof does.¹ Use the cash to pay off a car loan or seed a business and that slice of the debt produces zero deductible interest. Lenders don’t track how you spend the money, so keep contractor invoices and receipts indefinitely to prove the trace.

Points on a refinance normally have to be spread over the life of the new loan rather than deducted all at once. If the mortgage exceeds the applicable cap, your points are subject to the same proration ratio as your interest, calculated using the same decimal from line 14 of the Publication 936 worksheet.¹

Putting the Number on Your Tax Return

Your lender sends Form 1098 each January. Box 1 shows the total mortgage interest received during the prior year, including prepayment penalties and late charges. Box 2 shows principal as of January 1.⁵

Form 1098 reports raw interest. It does not apply the cap or run any proration. If your balance is above the limit, the number in Box 1 is not the number that goes on your return. Run the proration yourself and enter only the limited amount on Schedule A.

Keep your amortization schedule, monthly statements, and the completed worksheet with your tax records. The IRS does not have a standalone form for the proration itself — the Publication 936 worksheet is the mechanism. If you carry multiple mortgages, run one worksheet using the combined totals. Tax software handles this automatically, but only if you feed it the correct average balance.

One recent change to watch for: starting in 2026, mortgage insurance premiums are no longer treated as deductible interest.² If you were including PMI in prior-year totals, drop it from your calculation.

What Happens If You Get the Math Wrong

Overclaiming the deduction can draw an accuracy-related penalty of 20% of the resulting tax underpayment. The penalty applies when there’s a substantial understatement of income tax, which for most individual filers means the understatement exceeds the greater of 10% of the tax that should have been shown on the return or $5,000.⁶

Take the worked example above. Deducting the full $55,000 instead of the correct $41,250 overstates the deduction by $13,750. At a 32% marginal rate, that’s $4,400 of additional tax, close to the $5,000 trigger and comfortably inside the 10% test for many filers. The 20% penalty would pile on another $880. Running the proration carefully, and keeping the worksheet to back it up, is the cheapest insurance available.

1
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
2
Congress.gov. H.R.1 – 119th Congress – Text
3
Congress.gov. Reforms to the Mortgage Interest Deduction With Revenue Estimates
4
Office of the Law Revision Counsel. 26 USC 163 – Interest
5
Internal Revenue Service. Instructions for Form 1098 – Mortgage Interest Statement
6
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments