The mortgage interest deduction in San Diego runs into a wall that most of the country never hits: the federal deduction is limited to interest on the first $750,000 of acquisition debt, and our county median sale price is right around $1.02 million. That means a perfectly ordinary San Diego purchase — 20% down on a median-priced house — already puts a client above the cap on day one. The deduction does not disappear. It just stops growing.
I am writing this one for the CPAs and tax preparers I work with across San Diego County. You are heading into the September 15 estimated-payment date and then straight into Q4 planning season, and some of your clients are going to sit down across from you having already signed a loan you never saw. This is the conversation I wish happened three weeks earlier, every single time.
Key takeaways
- Federal interest is deductible on the first $750,000 of acquisition debt for loans taken after December 15, 2017. Older loans keep the grandfathered $1,000,000 limit.
- The cap is combined across a main home and one second home — not $750,000 apiece.
- California has not conformed. The state limit still sits at $1,000,000 of acquisition debt, so the federal and state numbers will not match on a San Diego return.
- Above $750,000, deductible interest effectively flattens. At today’s Freddie Mac average of 6.66%, that ceiling lands near $49,700 of first-year deductible interest no matter how large the loan gets.
- Mortgage insurance premiums are deductible again for tax years beginning after December 31, 2025, which changes the PMI conversation.
The rule, in one paragraph
Under IRC §163(h), interest is deductible on acquisition indebtedness — debt used to buy, build, or substantially improve a qualified residence and secured by that residence. For loans originated after December 15, 2017, the ceiling is $750,000 ($375,000 married filing separately). Loans on or before that date keep the $1,000,000 ceiling. The One Big Beautiful Bill Act made the $750,000 limit permanent, so the sunset back to $1,000,000 that some clients are still waiting for is not coming. Home equity debt not used to improve the residence remains non-deductible. The mechanics and the worksheet for loans over the limit live in IRS Publication 936.
Why the mortgage interest deduction limit bites so hard in San Diego
Take the median. A $1.02 million San Diego home with 20% down is an $816,000 loan. At the current 30-year fixed national average of 6.66% (Freddie Mac PMMS, August 27, 2026), that is roughly $54,100 of interest in year one. But only 750,000 ÷ 816,000 — about 91.9% — is deductible federally. Roughly $4,400 of real, paid interest gets no federal treatment at all.
Now watch what happens as the loan grows. This is the part that surprises people.
| Loan amount (30-yr fixed, 6.66%) | Year-1 interest paid | Deductible share | Federally deductible interest | Interest with no federal benefit |
|---|---|---|---|---|
| $750,000 | ~$49,700 | 100% | ~$49,700 | $0 |
| $816,000 (median, 20% down) | ~$54,100 | 91.9% | ~$49,700 | ~$4,400 |
| $900,000 | ~$59,600 | 83.3% | ~$49,700 | ~$9,900 |
| $1,100,000 | ~$72,900 | 68.2% | ~$49,700 | ~$23,200 |
Look at the fourth column. It does not move. Whether the client borrows $750,000 or $1.1 million, the federally deductible interest lands in the same place.
Above $750,000 of acquisition debt, every additional dollar of interest is a full-price dollar. There is no federal subsidy on the top slice of a San Diego mortgage.
For a client in a 32% federal bracket, that $23,200 of non-deductible interest on a $1.1 million loan is about $7,400 a year of benefit that simply is not there — money they may have quietly assumed was coming back. I have watched that number reshape a down payment decision more than once. If your client is anywhere near the San Diego conforming and jumbo loan limits, this belongs in the conversation before the loan amount is locked.
Three things worth flagging before the loan closes
1. The cap is combined across two homes, not per home
A client with an $800,000 balance on a Carmel Valley primary and a $500,000 note on a Palm Springs second home does not get $750,000 twice. They get $750,000 across both. That is a common and expensive assumption, and it usually surfaces after both loans are already in place — when the only remaining lever is paydown.
2. Federal and California will not agree, and that is normal
California did not conform to the federal reduction. The state acquisition-debt limit remains $1,000,000 ($500,000 MFS), which means a San Diego client with an $816,000 loan is capped federally and fully deductible at the state level. It is worth setting that expectation with the client early so the Schedule A and the Schedule CA difference does not look like an error when they see it.
3. Mortgage insurance is deductible again — which changes the PMI math
The mortgage insurance premium deduction was restored for tax years beginning after December 31, 2025, subject to the usual income phaseout. For a client weighing a smaller down payment with PMI against draining a brokerage account to reach 20%, that is a live variable again — and it interacts with everything above, because a smaller down payment means a larger loan and a smaller deductible share. I wrote up the removal side of that equation in how to remove PMI in San Diego.
What I actually need from you — and what you get back
The clients where this goes well have one thing in common: somebody looped in the other professional before the loan amount was final. When a CPA sends me a client at the pre-approval stage, I can model two or three loan structures against the $750,000 line and hand back the payment, the amortization, and the first-year interest split so you can run it against their actual bracket. That is a ten-minute exchange that occasionally saves a client five figures over a few years.
It works in the other direction too. Self-employed and K-1 clients are the ones most likely to be surprised by how a lender reads their return — I laid that out in how lenders calculate self-employed qualifying income. And for the broader itemization picture, the SALT cap piece is the other half of the San Diego homeowner’s Schedule A.
Frequently asked questions
Does refinancing reset the $750,000 limit?
Generally, a refinance of grandfathered pre-December 2017 debt keeps the older $1,000,000 treatment up to the balance being refinanced, subject to conditions in Publication 936. New money above the old balance is treated under current rules and only counts as acquisition debt if it is used to substantially improve the residence. This is exactly the fact pattern worth a joint call before anyone signs.
Is HELOC interest deductible for a San Diego client?
Only if the proceeds substantially improve the residence securing the loan, and only within the same $750,000 combined ceiling. A HELOC used to pay off cards or fund a business is not deductible mortgage interest, whatever the lender’s marketing says.
Should a client borrow less just to stay under $750,000?
Sometimes, and often not. The deduction is one input, not the decision. Liquidity, the opportunity cost of the cash, PMI, and whether they itemize at all usually matter more. That is precisely why this is a two-professional conversation rather than a rule of thumb.
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Ron Berg — San Diego mortgage lender, The Berg Group, powered by C2 Financial. I work with CPAs, financial planners, and real estate agents across California, Nevada, Arizona, and Maryland, and I would rather explain the math than sell you a rate.
This article is general education, not tax or legal advice, and it is not an offer or commitment to lend. Every client’s situation differs — please rely on your own analysis and the current IRS guidance for any return position. Rates referenced are cited national averages from Freddie Mac’s Primary Mortgage Market Survey and are not quotes. Ron Berg, NMLS #974839. C2 Financial Corporation, NMLS #135622, CA DRE #01821025. Equal Housing Opportunity.