What is classified as acquisition debt?

Acquisition debt refers specifically to the type of debt that is used to purchase, build, or substantially improve a residence. This classification is significant for tax purposes as it can impact the deductibility of mortgage interest. When taxpayers take out loans for their principal or secondary residence that are directly tied to these activities, that debt is classified as acquisition debt.

This means that if a taxpayer borrows money specifically to buy a home, construct a new home, or make significant renovations or improvements to an existing home, that debt is qualifying acquisition debt. Such debt typically allows for the interest paid to be deducted, promoting home ownership and real estate investment.

In contrast, personal loans and credit card debt do not generally qualify in the same manner; they are used for various expenses that do not relate specifically to the acquisition or improvement of residential property. Similarly, business-related debt would fall under different classifications relevant to business expenses, which do not encompass the definition of acquisition debt associated with residential properties.