Acquisition debt is debt that used to buy, build, or substantially improve your home. This does include closing costs like the application fee, the bank attorney fee, a survey, or other closing costs that are routine and required in your jurisdiction. Borrowing the money to fund your initial escrow deposit is not part of your routine closing costs, because that money is going to be spent on your property tax bills and your homeowners insurance. It is cash out, even though you didn’t receive the cash. (The cash was put into the escrow account to pay your future bills.). And frankly, you probably got a refund of the remaining escrow balance from your old lender didn’t you.
So the tax deductible interest on your acquisition debt is the part of your loan balance that was the remaining acquisition balance from the previous lender plus your regular closing cost but not including your escrow funding.
