the following assumes there was no cash-out refinancing (other than cash-out used to substantially improve the taxpayer's home that secures the loan IR-2018-32) on the debt on the first home. Special limits apply to the average mortgage balance that can be used. also that the 2nd home is secured by the mortgage on it.
the cap on both homes in total is $1M because the 1st mtge was taken out before 12/15/2017. either use Turbotax to fiqure the limitation by entering the 1098 info or use the worksheet in PUB 936 on page 10 line 1 is zero
there are many methods for computing the average mortgage balance
1) add balance at beginning of the month (start with January) and the end of the month and divide by 2. Do this for all 12 months. Total the averages then divide by 12
2) use only the month-end balances, total the 12 months then and divide by 12
3) for loans outstanding all year add the beginning and the end of the year balances and divide by 2
the irs says for 3) Average of first and last balance method.
You can use this method if all the following apply.
• You didn't borrow any new amounts on the mortgage during the year.
• You didn't prepay more than 1 month's principal during the year.
• You had to make level payments at fixed equal intervals on at least a semi-annual basis. You treat your payments as level
even if they were adjusted from time to time because of changes in the interest rate.
To figure the average balance:
a. Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year Usually 1/1,
b. Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year usually 12/31
c. Add amounts on a and b
d. Divide the amount on c by 2.0. if you use this method,enter the result on line 2
4) Interest paid divided by interest rate method. (i don't think Turbotax is capable of using this method)
You can use this method if at all times in 2021 the mortgage was secured by your qualified home and the interest was paid at least monthly.
to compute the average balance:
a. Enter the interest paid in 2021. Don't include points, mortgage insurance premiums, or any interest paid in 2021 that is for a year after 2021. However, do include interest that is for 2021 but was paid in an earlier year
b. Enter the annual interest rate on the mortgage. If the interest rate varied in 2021, use the lowest rate for the year
c. Divide the amount on a by b.
to compute deductible interest based on IRS PUB 936 worksheet on page 10 simplified because there is no grandfather debt and apparently the total of the average debt exceeds $1 million. see assumption at top
A) total the average mortgage balance for the two mortgages
B) $1,000,000 based on assumption at top
C) smaller of A or B
D) enter mortgage interest paid. do not include points or mortgage insurance
E) deductible mortgage interest = D times C divided by A
