Home Mortgage Interest Deduction in 2025–2026: What Los Angeles Homeowners Need to Know

At Velin & Associates, Inc., CPA Los Angeles, we regularly advise doctors, creators, e-commerce entrepreneurs, and high-net-worth individuals on how mortgage interest impacts their federal and California tax returns.

Recent legislation has now made several key mortgage interest rules permanent. If you own a home — or are planning to buy, refinance, or restructure debt — understanding these rules can directly affect your tax strategy.

Let’s break it down clearly.

The $750,000 Federal Mortgage Interest Limit Is Now Permanent

Under Internal Revenue Code §163(h)(3), taxpayers may deduct mortgage interest on up to $750,000 of acquisition debt ($375,000 if married filing separately).

This limitation, originally introduced by the Tax Cuts and Jobs Act (TCJA), has now been made permanent under the One Big Beautiful Bill Act (OBBBA).

That means:

• If you purchase a home today and take out a $1.2 million mortgage,
• Only the interest attributable to the first $750,000 is deductible for federal purposes.

For high-income professionals in Los Angeles — such as physicians, dentists, or business owners — this limitation often reduces the expected tax benefit from expensive real estate purchases.

What Qualifies as “Acquisition Debt”?

To qualify for deductible mortgage interest, the debt must:

1. Be used to buy, build, or substantially improve your home; and
2. Be secured by the residence.

A “qualified residence” includes:

• Your primary residence, plus
• One additional residence (second home) that you use as a residence.

Example: A doctor purchases a home in Beverly Hills for $2 million and finances $1 million through a mortgage in 2025.

For federal tax purposes:

• Interest is deductible only on the first $750,000.
• The remaining $250,000 portion generates non-deductible interest.

For California purposes (explained below), the result may be different.

Important Divorce Planning Rule

There is a frequently overlooked rule that benefits divorced homeowners.

If one spouse takes on additional mortgage debt to buy out the other spouse’s interest in the home, that debt is still considered acquisition debt — up to the applicable limit — even though the buyout does not increase the taxpayer’s basis in the property.

Example – Buyout After Divorce

A creator in Los Angeles refinances their home to remove a former spouse and pays $400,000 to buy out the spouse’s equity.

Even though this transaction does not add new improvements to the home, the debt qualifies as acquisition indebtedness (subject to limits), and interest may still be deductible.

This is an area where proper structuring matters significantly.

Pre-December 15, 2017 Mortgages (Grandfathered $1 Million Rule)

If you incurred acquisition debt on or before December 15, 2017, the old $1 million limit still applies ($500,000 if married filing separately).

This grandfathered treatment also applies to refinanced loans — but only up to the balance of the old loan at the time of refinancing.

Example – Refinancing an Older Mortgage

A business owner took out a $950,000 mortgage in 2016. In 2025, they refinance the remaining $800,000 balance.

Because the original debt predates December 16, 2017:

• The $1 million federal limit continues to apply.
• Interest remains fully deductible (subject to itemizing).

However, if they increase the loan to $1.1 million and pull out $300,000 cash for investments, that additional portion may not qualify.

Strategic refinancing planning is critical here.

Home Equity Loans: No Longer Deductible (Federally)

Interest on home equity debt is not deductible, regardless of when the debt was incurred, unless it qualifies as acquisition debt (used to substantially improve the home and secured by it).

This rule has now been made permanent.

Common Misunderstanding

Many taxpayers believe:
“I have a HELOC — so I can deduct the interest.”

Not necessarily.

If the HELOC was used for:

• Paying off credit cards
• Buying a car
• Funding a business
• Investing in crypto

The interest is not deductible as mortgage interest.

However, in some cases, the interest may be deductible under different rules (for example, as business interest). This requires proper documentation and tax planning.

California Nonconformity: Very Important for Los Angeles Taxpayers

California does NOT follow the federal $750,000 limit.

For California purposes:

• Acquisition debt limit remains $1 million
• Home equity debt up to $100,000 remains deductible
• Mortgage insurance premiums are NOT deductible

This creates federal vs. California differences on Schedule CA.

Example – High Income Professional in Los Angeles

A doctor has a $950,000 mortgage taken out in 2024.

• Federal deduction limited to interest on $750,000
• California allows deduction on the full $950,000

Result:
Different taxable income calculations between federal and state returns.

This difference is common among our CPA Los Angeles clients and must be calculated correctly to avoid notices.

Mortgage Insurance Premiums Are Now Permanently Deductible (Federally)

Beginning with the 2026 taxable year, mortgage insurance premiums (PMI) are again treated as deductible mortgage interest for federal purposes — and this change is now permanent.

Historically, this deduction expired and was extended repeatedly. That uncertainty is now gone.

However:

⚠️ California does NOT allow a deduction for mortgage insurance premiums.

Again, this creates federal/state differences.

Planning Opportunities for Our Clients

At Velin & Associates, Inc., we see these scenarios frequently:

1️⃣ YouTubers & Creators Buying High-End Homes

Large mortgages often exceed $750,000. Strategic ownership structuring and refinancing timing can reduce wasted interest deductions.

2️⃣ Doctors & Medical Practice Owners

High W-2 income makes itemized deductions more valuable. We analyze whether refinancing, accelerating improvements, or restructuring debt improves tax positioning.

3️⃣ E-Commerce & Shopify Store Owners

If a portion of the home is used exclusively for business, additional home office deductions may apply — separate from mortgage interest limitations.

4️⃣ High Net Worth Individuals

Multi-property ownership requires coordination between federal and California rules to maximize allowable deductions.

Key Takeaways

• $750,000 federal acquisition debt limit is permanent.
• Pre-2017 mortgages may still qualify under $1 million limit.
• Home equity interest generally not deductible federally.
• California allows more generous mortgage interest deductions.
• Mortgage insurance premiums become permanently deductible federally starting 2026.
• Proper structuring and documentation matter significantly.

In Los Angeles, where real estate prices are high, these rules materially impact tax outcomes.

If you are purchasing, refinancing, divorcing, or restructuring mortgage debt, proactive tax planning can prevent costly mistakes.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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