In 2019, we had 1 home (Home A). Interest was $25,000 on $500,000 principal. That $25,000 was fully deductible.
In 2020, Home A had interest of $24,000 and we bought a new Home B (bought in July 2020). Home B interest was $20,000 on $1,500,000 principal.
According to my understanding of the IRS rules:
- Home A average balance: assume $500,000
- Home B average balance: assume $1,500,000 for July through December
- Total average balance is therefore $2,000,000
- Total interest: $44,000
- Qualified limit is $750,000
- Deductible percentage amount is $750,000 / $2,000,000 = .375
- Deductible interest is .375 * 44,000 = $16,500
So, by buying a second home with a mortgage, I am now getting a lower amount of deductible interest. Is that accurate?
Do I have to include the new home in the tax forms, or I can just ignore it and stick with the $24,000 from Home A as the deductible amount?
