Acquisition debt are loan proceeds used to buy, build, or substantially improve your primary residence.
Home equity debt are loan proceeds used for any other purpose; in other words, the proceeds were not used to buy, build, or substantially improvement your main home.
Separating out these two kinds of mortgage debt could be easy or complicated. How complicated the process will be depends on whether you refinanced your mortgages.
If your only loans were the original mortgages used to buy your house, then all of your debt will be acquisition debt. You can exclude up to $2 million in acquisition debt under the Mortgage Forgiveness Debt Relief Act (or $1 million for a married person filing a separate return).
For refinanced loans, only the outstanding balance on the original acquisition debt mortgages will count. If you did a debt consolidation refinance, or took cash out, or had a home equity line of credit used for purposes other than to acquire a house, then that part of your debt will be home equity debt. This home equity debt will not qualify as part of the $2 million exclusion, but may qualify for exclusion under the insolvency or bankruptcy exceptions.
You will need to document the dollar amounts of this acquisition and home equity debt. A simple work paper might look something like this:
Purchase price of home: $200,000
$160,000 (first for 80% of home price)
$40,000 (second for 20% of home price)
15,000 (home equity line to repair roof)
Total acquisition debt so far: $215,000
Refinanced all three loans into $235,000 loan
Balance of original loans was $200,000
Consolidating credit bills of $35,000
Total acquisition debt: $200,000
Total home equity debt: $35,000
