Mortgage Home deduction that you cannot deduct

Foreign words for some of you - acquisition debt. I bet most of you never heard of it. If you don't own a property, you can sleep better at night. For the rest of you, you need to know this - because your accountant may not know this, nor your mortgage broker, and you might be on the hook with IRS.

Let's use a real example. It would be easier for you to understand an "acquisition debt" gibberish.

You are one of those lucky families that bought a $500k house, taking out a $400k mortgage and you are lucky you did not buy it at the top of the of the real estate market. And in with time, you paid some of your principal down, so you now owe only $200K to the bank.

But, a real estate market has been appreciating, your house is now worth $700k; a good rate to refinance, all stars align for you, and you refinance taking out $500k loan happily paying off previous mortgage bank what you owe - $200k, And you are pocketing $300k in cash to pay for your child's upcoming college education - you are a good parent after all!

Well, here is where your acquisition debt problem begins.
According to IRS, your acquisition debt is the original outstanding mortgage balance of $200k even though you paid it off via refinance. By law, you are allowed to add a $100k equity limit to your acquisition debt, so your acquisition debt limit is now $200k + $100k = $300k. With me so far?

But, you have borrowed $500k, so you are $200k short. $200k is almost ~30% of your refinance amount, so only ~70% of the interest in your primary home interest is tax deductible. I bet you thought you can deduct it all.

Well, IRS had NOT been scrutinizing this little known acquisition debt of yours, but it is changing. If you look at your 2016 tax form (1098) from your mortgage bank, you would see something you have never seen before:
1. IRS is now requiring banks to report mortgage origination date (Box 3)
2. IRS wants to know if an address of property securing the mortgage is same as payer's address. (Box 7)

Believe it or not, IRS is trying to curb the biggest deduction in US tax code.