Hi. I have read about this situation, but am still not really clear what to do. I bought a new principal residence during the year in 2023, and TT is adding both loans together to really limit my mortgage interest deduction. Here are the pertinent facts.
Loan A:
-Bought a primary residence in 2007.
-Mortgage was refinanced a few times, but last mortgage was an interest-only $550K.
-Interest was 13K for 2023.
-The home was sold in September 2023.
-I cannot calculate the average balance using the first day of the year/last day of the year and divide by two method because the principal was paid off in September 2023.
-Nor can I use the interest rate method because the loan was not outstanding the entire year.
-If I calculate monthly, using zeroes for the months after the loan was paid off (Sept-Dec), the math is 550K times 8 months divided by 12 months in the year, providing an average balance of $367K.
With the inconsistency in Publication 936 around using zero for the month the loan is not secured, but the requirement that you divide by the months the loan is secured, has this method of dividing by 12 been accepted by the IRS?
Loan B:
-Bought a new primary residence in August 2023.
-Mortgage is $1,020,000, also interest only.
-Interest was $20K for 2023.
-Again, I cannot use the first/last day method divided by 2, nor the interest rate method..
-If I use the same monthly method proposed above, with all zeros from Jan-July, the average balance is $425K ($1,020,000 times 5 divided by 12).
TT is simply adding $550K and $1,020,000 to get $1,570,000. That is a percentage of 48% (750/1570).
If I use the method above, my percentage is 95%.
The proposed method (dividing by 12) seems to make the most logical sense for a number of reasons, but does anyone have any experience or a more dispositive answer for this situation?
