Last year, I purchased a second home. I was surprised to learn that including the second home's mortgage in my itemized deduction Schedule A worksheet was actually worse for the overall interest I could deduct. After some close examination of the math behind the deduction worksheet, I think I understand why. The balance of my first mortgage exceeds the $1M cap (purchased prior to 2017) and the balance of my second mortgage exceeds the $750k cap. Therefore, my overall mortgage balance went up. However, the rules only allow for deducting the interest paid -- and the important part -- multiplied by $1M as a percentage of the total mortgage balance. Some numbers representative of my case:
First home:
$1.1 mortgage balance
$35k interest paid
Second home:
$1.2 mortgage balance
$10k interest paid
If only deducting the first home’s interest, I get to deduct:
$35k * ($1M / $1.1M) = $31,818
If deducting both home’s interest, I get to deduct:
($35k + 10k) * ($1M / ($1.1M + $1.2M)) = $19,565
Therefore, the clear conclusion is that it is better not to include the second home for the purpose of deductions.
My question to the tax experts is whether it is permissible to exclude the second home from my taxes so that I can increase my deductions? Or is there a rule that I have to include all mortgages for which I receive a 1098 in the deduction calculation? Thank you for your help!
