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

On a California return, you can deduct mortgage interest on up to $1 million of acquisition debt plus another $100,000 of home equity debt, for a combined ceiling of $1.1 million. That is more generous than the federal cap of $750,000, and California also lets you deduct home equity interest regardless of how you spent the money. The California mortgage interest deduction is claimed by itemizing on your federal return and then reconciling the state-federal difference on Schedule CA (540).¹

California never adopted the Tax Cuts and Jobs Act changes that lowered the federal acquisition debt limit and suspended the home equity deduction, and the One Big Beautiful Bill Act of 2025 made the federal $750,000 cap permanent. So the gap between the two systems is now a lasting feature, not a temporary one.²

The Two Debt Limits

Acquisition Debt Up to $1 Million

Acquisition debt is any loan used to buy, build, or substantially improve a qualified residence that is secured by that property. California caps deductible interest at an average loan balance of $1 million, or $500,000 if married filing separately, and the limit applies to the combined balance on a main home and one second home.²

Federally, the cap is $750,000 for loans originated after December 15, 2017.³ If your balance sits between those two numbers, you get a partial federal deduction but a full California deduction on the same interest. On a $900,000 mortgage at 7%, the gap is roughly $10,500 in additional state-deductible interest each year.

Home Equity Debt Up to $100,000

Home equity debt is any loan secured by a qualified residence that is not acquisition debt. California allows interest on up to $100,000 of such debt ($50,000 if married filing separately), and it does not matter how you spent the proceeds.² A HELOC used to pay off credit cards, buy a car, or cover a wedding still produces deductible interest on your California return.

Federally, home equity interest is deductible only if the money went into the home that secures the loan.¹ This is the most commonly missed California deduction. If you tapped home equity for anything other than improvements, the interest is nondeductible on your federal return but deductible on your state return up to the $100,000 cap.

Who Can Claim It

The debt has to be secured by a qualified residence, which means your main home plus up to one additional home. A second home can be a vacation house, condo, boat, or mobile home as long as it has sleeping, cooking, and bathroom facilities.³

You also have to itemize on your federal return. California piggybacks on that choice, so if you take the federal standard deduction, you cannot claim the California mortgage interest deduction either.³ Because California’s standard deduction is much lower than the federal one, there are situations where itemizing loses federally but would have won on the state side.⁴ You cannot split the difference. Run the numbers both ways if your federal itemized total is close to the standard deduction.

When Your Mortgage Exceeds the Ceiling

If your total mortgage debt is above $1.1 million for California purposes, you prorate the interest. Divide the qualified loan limit by the average balance of your mortgages, then multiply that ratio by the total interest you paid during the year.³

Say your primary mortgage averaged $1.2 million over the year and you paid $84,000 in interest. With no separate home equity debt, your California limit is $1.1 million. The deductible share is $1,100,000 ÷ $1,200,000 = 0.917. Multiply by $84,000 and you get $77,028 deductible for California. The same math runs separately at the federal level against the $750,000 cap, so taxpayers above both ceilings do the calculation 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 at the time of refinancing.³ Cash-out beyond that balance is acquisition debt only if you used it to improve the home. Any portion spent on something else is treated as home equity debt and runs against the $100,000 cap.

Picture a homeowner who owed $600,000 and refinanced into an $800,000 loan, pulling $200,000 out for non-home purposes. The $600,000 stays acquisition debt. Of the $200,000 in cash-out, $100,000 qualifies as deductible home equity debt on the California return. The last $100,000 produces no deduction anywhere.

Second Homes You Rent Out

A second home keeps its status as a qualified residence only if you personally use it for the greater of 14 days or 10% of the days you rent it at fair market value.⁵ Fall under that threshold and the property is reclassified as a rental. The mortgage interest deduction for that property disappears, and interest gets allocated between rental and personal use instead.

The other side of the rule: if you rent the home out for fewer than 15 days in the year, you do not report the rental income, and you can still deduct the full mortgage interest as a personal residence.⁵

Unmarried Co-Owners

The debt limits apply per taxpayer, not per residence. Two unmarried people sharing a mortgage can collectively deduct interest on up to $1.5 million of acquisition debt federally and up to $2 million for California.³ Each co-owner deducts only the interest they actually paid. If the lender sends a single Form 1098, both parties need to report their respective shares on their own Schedule A.

Points and Prepayment Penalties

Points paid to get a loan on your principal residence are generally deductible in the year you pay them, provided they reflect established local practice, are computed as a percentage of the loan, appear clearly on the settlement statement, and you brought at least that much in unborrowed funds to closing.⁶ Points on a refinance or second-home loan are spread over the life of the loan. California follows these rules.

Prepayment penalties also count as deductible mortgage interest unless the charge is for a specific service tied to the loan.³

The California AMT Catch

California’s alternative minimum tax does not treat home equity interest the same way the regular state tax does. Interest on a home equity loan used for something other than improving the home is added back to income when you figure California AMT. The FTB’s example: interest on a HELOC used to buy a boat is an AMT add-back, while interest on a HELOC used to install a pool is not.⁷ Higher-income homeowners claiming large home equity interest deductions for non-home spending should run the AMT numbers before counting on the full savings.

How to Claim It on Schedule CA (540)

Start on your federal return. Report all deductible mortgage interest on Schedule A (Form 1040), subject to the federal $750,000 cap and the federal home equity rules. Your lender sends Form 1098 by January 31 showing the interest you paid. If you paid interest to an individual seller instead of a lender, list the seller’s name, address, and taxpayer identification number on Schedule A.³

Then reconcile on Schedule CA (540). Line 8 is where mortgage interest adjustments go. Any interest the federal cap disallowed but California allows, and any home equity interest disallowed federally but deductible under the state’s rules, goes in Column C of line 8.¹ Column C increases your California itemized deductions above the federal amount. The adjusted total flows to Form 540 and reduces your California taxable income.

If you claimed the federal Mortgage Interest Credit on 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 do not lose the deduction on the state side.¹

Keep your Form 1098, your closing statements showing any points paid, and records of how you used any loan proceeds. The split between acquisition debt and home equity debt drives the whole calculation, and if the FTB asks, you will need documentation to show which bucket each dollar belongs in.

1
Franchise Tax Board. 2025 Instructions for Schedule CA (540)
2
Franchise Tax Board. Bill Analysis, AB 1932 – Secondary Residence Mortgage Interest Deduction
3
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
4
Franchise Tax Board. Deductions
5
Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
6
Internal Revenue Service. Topic No. 504, Home Mortgage Points
7
Franchise Tax Board. Instructions for Schedule P (540)