Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Updated March 27, 2022 Reviewed by Reviewed by Marguerita ChengMarguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
Acquisition debt is a financial obligation taken on during the construction, improvement, or purchase of a primary or secondary residence. Thus, a home mortgage loan is an example of acquisition debt.
The Internal Revenue Service (IRS) provides certain tax advantages for home acquisition debt. This should not be confused with acquisition financing, which refers to loans used by a business to buy another business.
Taxpayers may be able to deduct the interest paid during the tax year for mortgages that qualify as home acquisition debt. The IRS considers home acquisition debt to be any mortgage obtained after Oct. 13, 1987 that was used to buy, build, or substantially improve a main or secondary home. The mortgage must also be secured by that home as collateral. If the mortgage amount is more than the cost of the home, plus the costs associated with any substantial improvements, only the debt that is not greater than the cost of the home plus improvements will qualify as home acquisition debt.
The IRS limits the total amount of mortgage debt that can be treated as home acquisition debt. The total amount cannot exceed $1 million, or $500,000 if a married couple is filing as separate taxpayers. Under the Tax Cuts and Jobs Act, which passed Congress in December 2017, beginning in 2018, the amount of home acquisition debt (for new loans) that can be deducted decreased, to $750,000 ($375,000 for married couples filing separately). The IRS considers an improvement to be substantial if it adds value to the home, extends the home's useful life, or adjusts the home to new uses.
Acquisition debt can pose a risk if the borrower does not generate sufficient funds to cover required debt payments and find themselves underwater on the mortgage. This proved to be the case during the financial crisis that began in 2007. In response, Congress passed the Mortgage Forgiveness Debt Relief Act to allow homeowners whose lenders had forgiven part of all of their mortgage loans to avoid having to include the forgiven amounts in their income for tax purposes. According to the provision, “taxpayers may exclude from income certain debt forgiven or canceled on their principal residence.” As outlined in the Act, the exclusion applied to "qualified principal residence indebtedness.”
Businesses often use acquisition debt as a way to avoid issuing too many additional shares, which would be dilutive to shareholders and do damage to their stock price, and to benefit from favorable tax treatment for debt. Acquisition debt might include bridge (short-term) loans, borrowings available under their existing revolving credit lines, and bonds.
Often companies plan to reduce acquisition debt via a term out, or replace it with longer-term loans and bonds, and using cash flow generation to pay down borrowings. This minimizes the company exposure to floating interest rates by locking in the interest rates. Extended the term of debt obligations also preserves financial flexibility by allowing the company to spread its debt payments over several years.