What is Grandfathered Debt

Mortgages taken prior to October 13, 1987, which are commonly known as “Grandfathered Debt”, is tax deductible. If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. To qualify, the refinanced mortgage must have been secured by your qualified home on October 13, 1987. How you used the proceeds does not matter.

Grandfather debt is not limited. All of the interest you paid on grandfather debt is fully deductible home mortgage interest. Note that the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home’s fair market value for home equity debt.

Refinanced Grandfathered Debt
If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, you still treat it as grandfathered debt. If the new amount is greater than the mortgage principal, it is treated as home equity debt or home acquisition debt. The mortgage is a “mixed use mortgage“. The debt must also be secured by the qualified home.

You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. After that, you treat is at home acquisition debt or home equity debt, depending on how your use the proceeds.

Exception: If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. This term cannot be more than 30 years.

Example: Jim took out a $250,000 first mortgage on his home in 1983. Jim decided to refinance in 1992 with a new 30 year mortgage. The refinanced debt is treated as grandfathered debt for its entire term(20 years).

Line-of-Credit Mortgage
If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987.