How to Calculate Mortgage Interest Deduction Over $750,000

When your mortgage balance exceeds the federal cap, the deductible portion of your interest is a fraction, not the whole. To calculate a mortgage interest deduction 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 loans taken out after December 15, 2017, or $1,000,000 for older “grandfathered” mortgages ($375,000 and $500,000 respectively if you’re married filing separately).¹ The One Big Beautiful Bill Act made the $750,000 cap permanent, so this proration is not going away.²

Confirm Which Limit Applies to Your Loan

Before you touch a calculator, pin down the origination date. Mortgages taken out after December 15, 2017 use the $750,000 cap. Mortgages originated on or before that date keep the pre-TCJA $1,000,000 limit.¹ The grandfathering survives the OBBBA: even in 2026 and beyond, a pre-December 16, 2017 mortgage retains the $1,000,000 ceiling.³

The limit applies to your combined acquisition debt across your main home and one second home. You do not get a separate cap for each property. And only acquisition debt counts — money you borrowed to buy, build, or substantially improve a qualified residence, secured by that residence.⁴ Home equity borrowing used for anything other than improvements to the home securing the loan produces non-deductible interest, and the OBBBA continued that restriction. If your total qualifying balance is under the applicable limit, you deduct everything; the proration below only matters when you’re over.

Calculate Your Average Loan Balance

The number you need is the average outstanding principal for the year, not any single snapshot. Form 1098 Box 2 shows the balance on January 1, which is one data point, not an average.⁵ The IRS allows three ways to compute the average, and you can pick the one that fits your loan.¹

First and Last Balance

Add your January 1 balance to your December 31 balance and divide by two. You can use this shortcut only 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 the simplest option.

Interest Divided by Rate

Take the total interest paid during the year (excluding points and prepaid interest for future years) and divide it by your annual interest rate. If the rate changed during the year, use the lowest rate. This method works when the mortgage was secured by your qualified home and interest was paid at least monthly throughout the year.

Monthly Averages

If your lender provides monthly statements with closing or average balances, add all twelve figures and divide by twelve. This is the most precise method, and it handles rate resets and extra principal payments cleanly. Some lenders will give you the annual average directly on request, and you can use that figure as-is.

Run the Proration

Once you have the average balance and know your applicable limit, the formula is:

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

Divide the limit by the average balance, round the result to three decimal places, then multiply by your total interest. That is exactly what lines 11 through 15 of the Publication 936 worksheet walk you through.¹

A Worked Example

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. Your applicable limit is $750,000.

$750,000 ÷ $1,000,000 = 0.750. Multiply $55,000 by 0.750 and your deductible interest is $41,250. The remaining $13,750 of interest gives you no tax benefit.

Now change one fact: the loan was originated in November 2017, making it grandfathered. The applicable limit becomes $1,000,000. $1,000,000 ÷ $1,000,000 = 1.000, and the full $55,000 is deductible. The origination date is worth real money on a large balance.

The ratio moves each year as you pay down principal. Once your average balance drops below the applicable limit, the ratio hits 1.000 and proration ends. On a 30-year loan at typical rates, that crossover can take a decade or longer for a borrower who started near the cap.

Handle Refinances and Cash-Out Separately

Refinanced debt is treated as incurred on the origination date of the original mortgage for purposes of which limit applies — but only up to the balance of the old loan immediately before refinancing.¹³ Refinance a grandfathered loan and the new note keeps the $1,000,000 ceiling, capped at the payoff amount of the old loan.

Borrow more than the old balance and you end up with a single mortgage that behaves as two buckets. Suppose you refinance a grandfathered loan with $600,000 remaining into a new $750,000 mortgage. The first $600,000 keeps the $1,000,000 limit. The extra $150,000 is new debt subject to the $750,000 cap. Your proration has to account for both buckets.

Cash-out proceeds count as acquisition debt only to the extent you spend them on substantial improvements to the home securing the loan. Use the cash for a car, tuition, or a business, and that portion generates zero deductible interest. Trace every dollar to its use and keep the receipts and contractor invoices — the burden of proof is yours, not the lender’s.

Combine Balances Across Homes

The dollar limit is a household total across your primary home and one second home, not a per-property allowance.¹ Carry a $500,000 mortgage on your main home and a $400,000 mortgage on a vacation house and your combined debt is $900,000, above the $750,000 cap. You prorate the total interest on both loans using the combined average balance.

You can designate only one primary residence and one second home at a time. Own three properties and only two feed into the deduction.

Read Form 1098 the Right Way

Your lender sends Form 1098 each January. Box 1 reports the total mortgage interest received, including prepayment penalties and late charges.⁵ The lender does not apply the debt limit and does not perform any proration. If your balance exceeds the cap, the number in Box 1 is not the number that belongs on Schedule A.

Run the Publication 936 worksheet yourself and enter the limited amount. Keep your amortization schedule, monthly statements, and the completed worksheet in your tax files. If you have multiple mortgages, work the calculation on the combined totals. Tax software handles the proration automatically for most filers, but only if you enter the correct average balance — the wrong input produces the wrong deduction with no warning.

What Happens If You Skip the Proration

Overclaiming the deduction can trigger a 20% accuracy-related penalty on the resulting underpayment. The penalty applies to a “substantial understatement,” which for most individual filers means the understatement exceeds the greater of 10% of the tax that should have been shown or $5,000.⁶

In 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 in extra tax owed, close to the $5,000 flat trigger and well past the 10% test for most filers. Add a 20% penalty and you’re another $880 in the hole. On a large mortgage the math is worth doing carefully, once, and keeping on file.

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