Thanks, this is extremely helpful!
Now that the average balance calculation is figured out, there's one more caveat to throw in there. The sellers of the new house rented it back for 60 days following closing. Their rent equaled the amount of taxes, insurance and mortgage interest during that time (i.e. my carrying cost).
I have read that there are a couple ways to handle this: 1) treat it as a rental properly for 60 days, reporting their income, and the expenses are the tax, insurance and interest during that period; or 2) effectively adjust the cost basis on the house down by the amount of their "rent", in which case I would realize taxes due upon the sale of the home (as part of the capital gain). Thoughts on which is the best approach?
