Think Your Mortgage Interest Is Fully Deductible? Think Again!
How high mortgage amounts limit your tax deduction and what changes are coming in 2026.
“Hey Kenny Kim! I want a second opinion,” said Natoshi Sakamoto, my EM colleague.
He came to me thinking that his CPA had made a ridiculous mistake.
“I paid $100,000 in mortgage interest last year, but my accountant only gave me $50,000 in mortgage interest deduction. Now I owe the government $20,000 more in taxes!” His voice was charged with frustration.
He added that he bought his house for $2 million with a $1.5 million mortgage at 6.66%.
Ah hah!
I knew right away why his accountant “gave him” only $50,000 in mortgage interest deduction.
It’s because the mortgage interest that Natoshi paid is only deductible on the first $750,000 of his $1.5 million mortgage for federal income tax purposes.
In fact, Natoshi was not the first colleague to complain that their home mortgage did not provide the tax benefits they expected for the same reason—their mortgage amount was too high. (Well, in the Bay Area, CA, even a shack on the verge of collapse might sell for over $1 million!)
I consoled him by explaining that:
1. His accountant was correct (so he wasn’t dumb)—only half of his mortgage interest is deductible under the current tax code, Internal Revenue Code §163(h).
2. Starting in 2026, when the Tax Cuts and Jobs Act tax reform sunsets, he may be able to deduct mortgage interest paid on the first $1 million of his mortgage, which would increase his deductible interest to $75,000, unless Congress changes the tax code.
Natoshi was not happy that I confirmed his tax accountant was not wrong, which meant he still owes the IRS $20K, but at least he didn’t have to waste time finding another tax accountant.
The moral of the story: If you plan to take out a large mortgage, expect that the tax deduction you are entitled to will be limited to the interest paid on the first $750,000 this year and the first $1 million starting in 2026.
Disclaimer
One of my heroes, Mel Herbert, MD, founder of EM-RAP, may have once said:
“Don’t just do something, stand there.”
That would be my advice to you after reading my blog—stand there (for now) and don’t do anything (yet).
Why?
While I am a tax professional, I am not your tax professional. I do not know your particular situation, and tax matters can be complex. What works for one person may not work for another.
Before taking action, assess your situation and consult with your tax professional to ensure any strategy aligns with your specific circumstances.