Under prior tax law, taxpayers who itemized deductions could deduct “qualified residence interest” on up to $1 million of debt secured by a qualified residence and used to acquire, build or improve that residence (referred to as “acquisition debt”), plus interest on home equity debt up to $100,000. (The limits were half those amounts for married taxpayers filing separately.) The home equity debt couldn’t exceed the fair market value (FMV) of the home reduced by the debt used to acquire the home.
But the $100,000 limit didn’t apply to the extent the home equity debt qualified as acquisition debt. For example, if the home equity debt was used to improve the home securing that debt, the $100,000 limit didn’t apply.