The mortgage interest deduction is one of the most discussed and most misunderstood tax benefits in American homeownership. For 2026 — and now permanently — the deductible mortgage debt is capped at $750,000 ($375,000 for married filing separately) on loans originated after December 15, 2017. Older loans are grandfathered at the original $1 million limit.1 The bigger 2026 change isn't to the mortgage cap itself — it's to the SALT (state and local tax) deduction cap, which jumped from $10,000 to $40,000 for married joint filers under the One Big Beautiful Bill Act.2 For California homeowners with high property tax bills, this is a substantial benefit. Here's the full picture.
The basics: what's deductible
Mortgage interest is potentially deductible if all of the following are true:1
- The mortgage is secured by your primary residence or a qualified second home.
- The loan was used to "buy, build, or substantially improve" the home (called "home acquisition debt").
- You itemize deductions on Schedule A rather than taking the standard deduction.
- The total acquisition debt across all qualifying homes falls within the applicable cap.
The two debt caps
Which cap applies depends on when your mortgage was originated:
| Mortgage origination date | Acquisition debt cap (single/MFJ) | Cap (married filing separately) |
|---|---|---|
| Before December 16, 2017 ("grandfathered") | $1,000,000 | $500,000 |
| December 16, 2017 or later | $750,000 | $375,000 |
The $750K cap was originally scheduled to sunset at the end of 2025 and revert to $1M. The OBBBA, signed in 2025, made the $750K cap permanent.23 Buyers who hoped for a return to the higher cap will need to plan around the lower limit indefinitely.
The "buy, build, or substantially improve" rule
Critically, the cap applies only to "home acquisition debt" — debt used to buy, build, or substantially improve a qualifying home. This rule has two important implications:
Cash-out refinance proceeds are partially deductible
If you refinance and take cash out, the interest on the cash-out portion is deductible only if the cash is used for qualifying home improvements. Using cash-out funds for debt consolidation, college tuition, or any other purpose makes that interest non-deductible.
Example: $700,000 existing mortgage. Cash-out refinance to $850,000. The $150,000 cash-out is used:
- $80,000 for kitchen remodel and bathroom addition (substantial improvement) → deductible
- $50,000 for student loan payoff → not deductible
- $20,000 for new car → not deductible
Result: $780,000 of the new $850K loan is "qualified" acquisition debt. Interest on the remaining $70,000 isn't deductible. Tracking this requires careful documentation of how cash-out proceeds were used.
HELOC and home equity loan interest is now restricted
Pre-2018, home equity loan interest was deductible regardless of how you used the proceeds. Now, it's deductible only if the funds went toward home acquisition or substantial improvements — same standard as cash-out proceeds. Using a HELOC for tuition, debt consolidation, or general expenses produces non-deductible interest.2
What "substantial improvement" means
The IRS defines substantial improvement as work that:
- Adds value to the home, OR
- Prolongs the home's useful life, OR
- Adapts the home to new uses
Examples that typically qualify: adding a room or bathroom, building an ADU, installing solar panels, replacing the roof, major kitchen remodel that adds value, foundation repairs, finishing a basement.
Examples that typically don't: routine maintenance, cosmetic updates, painting, fixing leaks, replacing existing fixtures with similar fixtures.
The SALT cap change: a major 2026 win for California homeowners
From 2018 through 2025, the SALT cap was $10,000 — a meaningful constraint for California homeowners with high property taxes and state income taxes. The OBBBA increased the cap dramatically for 2026-2029:2
| Filing status | 2025 SALT cap | 2026 SALT cap (after OBBBA) |
|---|---|---|
| Single / Head of household | $10,000 | $40,000 |
| Married filing jointly | $10,000 | $40,000 |
| Married filing separately | $5,000 | $20,000 |
The cap reverts to $10,000 in 2030 unless Congress takes further action. The cap is also subject to a phase-out for higher-income taxpayers — beginning at $500,000 MAGI for joint filers, the higher cap reduces by 30% of MAGI above the threshold, but never below the original $10,000 floor.
What this means for San Diego homeowners
Worked example for 2026:
Married couple, household income $250,000, $900,000 mortgage at 6.23%, $11,000 annual property tax, $9,000 California state income tax.
- Mortgage interest paid (year 1): roughly $55,800
- Deductible mortgage interest: ($750,000 / $900,000) × $55,800 = $46,500
- SALT (capped at $40,000): $11,000 + $9,000 = $20,000 (under cap)
- Total itemized deductions: $46,500 + $20,000 = $66,500
- 2026 standard deduction (MFJ): roughly $30,000
- Itemizing benefit: $36,500 in additional deductions
At a 24% federal marginal tax rate, that's roughly $8,750 in federal tax savings annually. Under the old $10,000 SALT cap, the same household's itemized deductions would have been $46,500 + $10,000 = $56,500 — a $10,000 smaller deduction, or $2,400 less in tax savings. The 2026 SALT change is worth roughly $2,400/year for this household.
The OBBBA also restored deductibility of private mortgage insurance (PMI) premiums for 2026 — phasing out for AGI above $100,000 (single) or $50,000 (MFS).2 For low-down-payment buyers paying $200-$400/month in PMI, this can produce $50-$100/month in tax savings if income is below the phase-out. Most San Diego buyers using FHA or low-down conventional fall above the AGI phase-out — but for moderate-income first-time buyers, this is a meaningful benefit.
The proration rule for high-balance loans
If your loan balance exceeds the applicable cap, you can still deduct a portion of your mortgage interest — proportional to the cap divided by your loan balance.
Example: $1,000,000 mortgage originated in 2024, post-TCJA cap of $750,000.
- Deductible portion: $750,000 / $1,000,000 = 75%
- If you paid $62,000 in mortgage interest in 2026, deductible amount: $46,500
- Non-deductible: $15,500
For San Diego buyers using jumbo loans above the conforming limit, this proration is the practical reality. The cap doesn't disqualify your interest entirely — it just limits the deductible portion proportionally.
Refinancing considerations
Grandfathered loans
If your original mortgage was originated before December 16, 2017, you maintain the $1M cap as long as you don't increase the principal balance when refinancing. Two scenarios:
- Rate-and-term refinance with no cash out: Grandfathered status preserved. New loan inherits the higher $1M cap.
- Cash-out refinance increasing principal: The portion above the original balance loses grandfathered status. The original principal portion stays at $1M; new principal gets the $750K cap.
Refinanced acquisition debt
When you refinance home acquisition debt, the new loan is treated as acquisition debt only up to the principal balance just before refinancing. Additional borrowing requires "buy, build, or substantially improve" use to be deductible.
The standard deduction comparison
The mortgage interest deduction only matters if your total itemized deductions exceed the standard deduction. For 2026:
- Single: ~$15,750 standard deduction
- Married filing jointly: ~$31,500 standard deduction
- Head of household: ~$23,000 standard deduction
For most San Diego homeowners with mortgages above $400K, total itemized deductions clear these thresholds easily. For first-time buyers with smaller loans, runs may favor the standard deduction depending on state tax burden and other deductions.
Common mistakes
- Assuming all cash-out interest is deductible. Track how cash-out proceeds were used. Non-improvement uses are non-deductible.4
- Forgetting grandfathered status on pre-2018 loans. The higher $1M cap is real and benefits buyers who haven't refinanced in 8+ years.
- Failing to itemize when the math favors it. For most California homeowners with mortgages above $500K, itemizing produces substantially better outcomes than taking the standard deduction.
- Not adjusting for the new SALT cap. The 2026 increase from $10K to $40K is one of the most consequential tax changes for high-cost-state homeowners in years. If your tax software is set up for the old cap, the math is wrong.
Run a scenario including expected tax benefits.
Open the calculator →The honest read
The mortgage interest deduction isn't the homeownership-defining benefit it was pre-2018, but it remains substantial for California homeowners with high-balance loans. The 2026 SALT cap change is the bigger story — for many California families with property taxes between $10K-$30K and meaningful state income tax, the new $40K cap restores a deduction that disappeared with TCJA. Combined with mortgage interest, the deductions can again exceed the standard deduction for typical California homeowners. Track cash-out proceeds carefully (only improvement-use is deductible), plan around the $750K cap when shopping for high-balance loans, and confirm your tax software is using the new SALT cap. For families with grandfathered pre-2018 loans, refinancing decisions need to weigh the loss of grandfathered status carefully.
Tax law is complex and changes regularly. Always work with a qualified tax professional for individual situations. Educational content only — not legal, tax, or financial advice.
References
- Internal Revenue Service. (2024). Publication 936: Home mortgage interest deduction. Retrieved April 28, 2026, from https://www.irs.gov/publications/p936
- Public Law 119-XX. (2025). One Big Beautiful Bill Act (OBBBA): Provisions affecting individual taxpayers. Retrieved April 28, 2026, from https://www.congress.gov/
- Congressional Research Service. (2025). The mortgage interest deduction (CRS Report IF12789). Retrieved April 28, 2026, from https://www.congress.gov/crs_external_products/IF/HTML/IF12789.html
- Internal Revenue Service. (2025). Topic 504: Home mortgage points. Retrieved April 28, 2026, from https://www.irs.gov/taxtopics/tc504