Which term describes debt incurred to acquire, construct, or substantially improve a primary or secondary residence?

• A. Home equity debt
• B. Personal debt
• C. Acquisition indebtedness
• D. Mortgage insurance

Answer: (C)

Acquisition indebtedness is the debt type that applies when the loan is used to acquire, construct, or substantially improve a primary or secondary residence. This category matters because it defines the mortgage interest that can be treated as a deductible expense for tax purposes, within the applicable limits. It specifically covers the loan you used to buy the home, finance its construction, or fund major improvements that add value. In contrast, home equity debt refers to borrowing secured by the home for purposes other than buying or improving the home; personal debt isn’t tied to the property; and mortgage insurance is insurance protecting the lender, not a type of debt.