California Mortgage Interest Deduction: Limits, AMT, and Schedule CA

On a California return, you can deduct home mortgage interest on up to $1 million of acquisition debt plus an additional $100,000 of home equity debt, for a combined ceiling of $1.1 million. That is more generous than the federal deduction, which caps acquisition debt at $750,000 and only allows home equity interest when the loan proceeds were used to buy, build, or substantially improve the home. The California mortgage interest deduction is claimed by itemizing on your federal Schedule A and then adjusting for the state’s higher limits on Schedule CA (540).

The Two Debt Limits

Acquisition Debt: $1 Million

Acquisition debt is any loan used to buy, build, or substantially improve a qualified residence and secured by that property. California caps deductible interest at a combined loan balance of $1 million, or $500,000 if you’re married filing separately.¹ The limit applies to debt incurred on or after October 13, 1987, and it covers a main home and a second home together, not each one separately.

The federal ceiling is $750,000, or $375,000 if married filing separately, for loans originated after December 15, 2017.² If your mortgage balance sits between $750,000 and $1 million, your federal deduction is partially limited but your California deduction covers the full interest. On a $900,000 mortgage at 7%, that gap is roughly $10,500 in additional state-deductible interest each year.

Home Equity Debt: $100,000, No Purpose Test

Home equity debt is any loan secured by a qualified residence that isn’t acquisition debt. California allows interest on up to $100,000 of home equity debt ($50,000 if married filing separately), and it does not care how you spent the money.¹ You can tap a HELOC to consolidate credit card balances, buy a car, or pay tuition, and the interest is still deductible on your state return.

Federally, this deduction is much narrower. Home equity interest is deductible only if the proceeds were used to buy, build, or substantially improve the home securing the loan.³ Interest on a HELOC spent on anything else is nondeductible federally but still deductible for California purposes. This is where homeowners most commonly miss a legitimate state deduction.

Who Can Claim It

Two conditions have to be met. The debt must be secured by a qualified residence, meaning your main home plus one additional home. The second home can be a house, condo, boat, or mobile home, so long as it has sleeping, cooking, and bathroom facilities, and you can designate only one second home at a time.²

You also have to itemize on your federal return. California ties its itemization to your federal choice, so taking the federal standard deduction eliminates the California mortgage interest deduction too.² California’s own standard deduction is much lower than the federal one, so a homeowner whose federal itemized deductions barely beat the federal standard deduction should still run the numbers; if the federal standard wins, the state deduction goes away with it.⁴

When Your Balance Exceeds $1.1 Million

If your combined mortgage debt is above California’s ceiling, you can’t deduct all the interest. You calculate the deductible share with a ratio: divide the qualified loan limit by the average balance of your mortgages during the year, then multiply that by total interest paid.²

Say your primary mortgage averaged $1.2 million and you paid $84,000 in interest, with no separate home equity debt. Your California limit is $1.1 million. The ratio is $1,100,000 ÷ $1,200,000, or 0.917. Applied to $84,000, that gives $77,028 in deductible California interest; the remaining $6,972 is not deductible. The same math runs at the federal level using $750,000, so if both limits are exceeded you calculate twice.

Refinancing and Cash-Out

When you refinance, the new loan counts as acquisition debt only up to the outstanding balance of the old mortgage on the refinance date.² Cash pulled out on top of that isn’t automatic acquisition debt. If you used the extra funds to renovate the home, that portion stays acquisition debt. If you used it for anything else, it becomes home equity debt, capped at $100,000 for California and not deductible federally.

A homeowner who owed $600,000 and refinanced into an $800,000 loan, pulling $200,000 out for non-home purposes, has $600,000 in acquisition debt and $200,000 in equity debt. California allows $100,000 of that equity portion to generate deductible interest. The other $100,000 generates no deduction anywhere.

Second Homes and Rental Use

A second home keeps its qualified-residence status only if you use it enough personally. When you rent it out, you have to use it yourself for the greater of 14 days or 10% of the days it’s rented at fair market value.⁵ Drop below that and the property is reclassified as a rental, the mortgage interest deduction for it goes away, and interest gets allocated against rental income instead.

Rent it for fewer than 15 days in the year and the rules flip the other way: you don’t report the rental income at all and you keep the full mortgage interest deduction as a personal residence.⁵

Unmarried Co-Owners Get Separate Limits

The debt caps apply per taxpayer, not per residence. Two unmarried co-owners of one home can collectively deduct interest on up to $1.5 million of acquisition debt federally and up to $2 million for California purposes.² Each co-owner deducts only the interest they actually paid. When the lender issues a single Form 1098 in one name, each person still reports their own share on their own Schedule A.

The California AMT Catch on Non-Improvement Equity Interest

California has its own alternative minimum tax, and it treats home equity interest differently from the regular calculation. Interest on a home equity loan used for something other than improving the home gets added back to income when computing California AMT. The FTB’s example: interest on a home equity loan used to buy a boat is an AMT add-back, while interest on a home equity loan used to install a pool is not.⁶

The regular deduction still stands, but the AMT add-back can shrink the net benefit for higher-income taxpayers. If you’re claiming a large equity-interest deduction for non-home spending, work through Schedule P before assuming the full savings survive.

Claiming It on Schedule CA (540)

The mechanics start with your federal return. Report deductible mortgage interest on Schedule A (Form 1040) subject to the federal $750,000 limit. Your lender should send Form 1098 by January 31 showing the interest paid. If you paid interest to an individual seller rather than an institutional lender, list the seller’s name, address, and taxpayer ID on Schedule A.²

Then you reconcile on Schedule CA (540), line 8, which is the line for mortgage interest adjustments. Any California-allowed interest that exceeded the federal $750,000 cap goes in Column C. So does any home equity interest disallowed federally because the proceeds weren’t used on the home. Column C entries increase your California itemized deductions above your federal ones.³

The adjusted total flows to Form 540 and reduces your California taxable income. One more wrinkle: if you claimed the federal Mortgage Interest Credit (Form 8396), you had to reduce your Schedule A interest by the credit amount. California lets you add that back on Schedule CA so you don’t lose it on the state side.³

Hold on to your Form 1098, closing statements, and records of how any refinance or HELOC proceeds were spent. The line between acquisition debt and home equity debt drives the entire calculation, and if the FTB asks, that paper trail is what supports your numbers.

1
Franchise Tax Board. Bill Analysis, AB 1932 – Secondary Residence Mortgage Interest Deduction
2
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
3
Franchise Tax Board. 2025 Instructions for Schedule CA (540)
4
Franchise Tax Board. Deductions
5
Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
6
Franchise Tax Board. Instructions for Schedule P (540)