your example assumes the $2mm mortgage was taken out on Jan 1 so the math presented is reasonable.
But the word 'average' needs more in depth discussion. This is the world of the IRS and not of the common man!
the worksheet you filled out is from Page 12 of this document published by the IRS, so they are The Truth:
https://www.irs.gov/pub/irs-pdf/p936.pdf
if you read on page 13 there is a whole discussion on 'average' - I kid you not!
while the two point average is good enough for a mortgage you've had all year, it really doesn't work if another mortgage is introduced later in the year (or paid off).
Let's say Mortgage 1 is $500,000 and Mortgage 2 is $300,000; both were taken out after 2017 so the limit if $750,000 appears to have been pierced.
but let me change the facts. Mortgage 1 was taken out in 2018 and Mortgage 2 was taken out in December 2020. Is the average for 2020 still $800,000? Or is it $500,000 for 11 months and $800,000 for the 12th month, meaning the average for the year is only $525,000 (11 months at $500,000 and 1 month at $800,000).
Yes, in 2021 you are over the $750,000 threshold, but not in 2020
Look at the Mr. Blue example in the middle column of page 13. because it divides back the actual interest by the interest rate to get to the average balance , in effect you are not getting "hit" for the months the $300,000 mortgage doesn't exist.
Let's say the $500,000 mortgage was at 4% and the $300,000 was at 5% and originated in December.
The $500,000 mortgage: $20,000 / 4% = $500,000 - no shock here.
the $300,000 mortgage: $1,250 of interest (December only) / .05 = $25,000!!!!!!!!! NOT $300,000!!!!!
The "averages" you would add together is $500,000 and $25,000!!!!!
So 'average' doesn't necessarily mean a two point average, especially in a year that a new mortgage is introduced or an old mortgage is extinguished!!! see how that affects your worksheet; I suspect you'll get a better answer!!!!
ps would have been so much easier and straight forward if the IRS just said to take a 12 point average and use zero for the months that mortgage did not exist because it either originated or paid off. BUT NO, they go through this whole convoluted approach of interest / interest rate and never directly say what the purpose is!
Hope this helps!
