The $750,000 Mortgage Interest Cap Was Set in 2017, When the Median Home Cost About $320,000. OBBBA Made It Permanent and Never Indexed It
Congress locked in a mortgage interest cap from 2017 and skipped one small step that quietly shrinks the tax break for new homebuyers every single year prices rise.
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A couple who borrows $1 million to buy a home in 2026 can deduct interest on only three-quarters of it. The limit sits in Internal Revenue Code Section 163(h)(3), and its $750,000 ceiling hasn’t moved since 2017.
That year, the median new home sold for about $320,000, per Census Bureau data. By the second quarter of 2026, the median had reached $410,700. The One Big Beautiful Bill Act (OBBBA) made the cap permanent without indexing it to inflation, so each year of rising prices makes the break a little smaller.
What Homeowners Could Deduct Before the 2017 Overhaul
Before the Tax Cuts and Jobs Act (TCJA), Section 163(h)(3) let itemizers deduct interest on up to $1 million of acquisition debt. That covered loans used to buy, build, or substantially improve a main home or second home. Itemizers could also deduct interest on up to $100,000 of home equity debt, and they could spend that money on anything: a boat, tuition, or paying off credit cards.
TCJA cut the acquisition limit to $750,000 ($375,000 for married filing separately) for loans taken out after December 15, 2017. It also suspended the home equity deduction. Both changes were set to expire after 2025.
OBBBA Locked In the $750,000 Cap for Good
OBBBA, enacted as Public Law 119-21, removed that expiration date. The $750,000 limit and the home equity suspension are now permanent. Home equity interest qualifies only when the money buys, builds, or substantially improves the home that secures the loan, and that balance counts toward the $750,000.
The law added two incentives. Starting in 2026, private mortgage insurance premiums count as deductible mortgage interest again, subject to an income phaseout. The law also raised the SALT cap to $40,000, which drives more homeowners toward itemizing.
Congress skipped indexing. Tax brackets and the standard deduction adjust for inflation every year, while the mortgage cap stays at $750,000 until lawmakers change it.
How a $1 Million Mortgage Costs $3,900 in Extra Tax
Consider an hypothetical married couple filing jointly in 2026. They itemize, sit in the 24% bracket, and carry a new $1 million mortgage at an assumed 6.5% rate. First-year interest comes to about $65,000.
| Rule | Deductible Interest | Nondeductible Interest |
|---|---|---|
| Pre-TCJA ($1 million limit) | $65,000 | $0 |
| OBBBA ($750,000 limit) | $48,750 | $16,250 |
The cap disallows $16,250 of interest. At a 24% rate, that adds $3,900 to the couple’s federal tax bill in year one. Interest on the first $750,000 of debt stays fully deductible. Households in the 37% bracket take a second hit: OBBBA reduces the value of itemized deductions by 2/37ths.
Why the Frozen Cap Squeezes Harder Every Year
In 2017, $750,000 covered 2.3 times the median new-home price. Today it covers about 1.8 times. If the cap had grown with new-home prices, it would sit near $953,000. Prices are still climbing. The Case-Shiller national index reached 336.7 in June 2026, its highest reading in the past year.
Location makes it worse. The Bureau of Economic Analysis puts California’s cost of living at 110.72 and Mississippi’s at 86.953, against a national average of 100. A single dollar cap hits coastal buyers years before it reaches a typical Mississippi homeowner. The $250,000/$500,000 home-sale exclusion has the same problem. It was set in 1997 and never indexed, so long-time owners in expensive markets get hit twice.
The deduction already helps a narrow group. Only about 10% of taxpayers itemize, according to Tax Notes.
Three Moves That Protect Your Mortgage Deduction
- Protect a grandfathered loan. Mortgages taken out on or before December 15, 2017, keep the $1 million limit. A refinance keeps it too, but only up to the old loan’s remaining balance. Any extra cash-out borrowing falls under the $750,000 rules.
- Document where home equity money goes. A HELOC that pays for a kitchen remodel can qualify, but one that pays for a car can’t. Keep receipts showing the money went into the house.
- Compare itemizing with the standard deduction every year. With the 2026 joint standard deduction at $32,200, a retiree with a small remaining balance may get no tax benefit from mortgage interest. That changes the math on paying the loan off early.
Whether to refinance a grandfathered loan or speed up payoff before retirement is worth working through with a CPA or fiduciary advisor.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
