@RaifH Thank you for your reply, sorry for my slow response it's been a busy week at work. Part of the problem here lies with the TurboTax Online inflexible inputs. The other problem is the fact that IRS Pub 936 gives zero guidance for this fairly common situation. Anyhow... Here's the deal.
I've gone through and manually calculated my average balances multiple different ways, per Pub 936:
Using the interest rate method for Avg Balance = interest paid / rate, I get:
Sold in Sept: $17,222 / 3.875% = $444,431
Purchased May: $11,736 / 2.875% = $408,198
Combined total (for line 12 in Pub 936) = $852,629
Using the monthly statement Avg Balance method from here, I get combined monthly mortgages of:
| $ 565,077 | Jan |
| $ 564,077 | Feb |
| $ 563,073 | Mar |
| $ 562,066 | Apr |
| $ 1,381,055 | May |
| $ 1,380,042 | Jun |
| $ 1,377,588 | Jul |
| $ 1,375,127 | Aug |
| $ 1,372,659 | Sep |
| $ 814,229 | Oct |
| $ 812,778 | Nov |
| $ 811,323 | Dec |
Which comes out to an average of $964,925 (for line 12), clearly not as favorable for me as the interest rate method.
By the way, the DIRECTIONS of Pub 936, say "Figure the average balance for the current year of each outstanding home mortgage. Add the average balances together and enter the total on line 12." Well, the paid-off mortgage is no longer outstanding. So *technically* my "outstanding" balance is just the new mortgage avg balance for the year: $815,661. This is technically the most favorable value for me, though it does rely heavily on the word "outstanding" in the instructions.
So let's fill out lines 1-16 in Pub 936, using Excel, and figure out what the final deductible interest should be, using those 3 different definitions of average balance.
| Line # | Literal "outstanding" balance method | Interest rate method | Averaging Monthly Balances |
| 1 | | | |
| 2 (Sept Sale Avg balance) | $ 561,045 | $ 444,431 | |
| 3 | $ 1,000,000 | | |
| 4 | $ 1,000,000 | | |
| 5 | $ 561,045 | | |
| 6 | $ 561,045 | | |
| 7 (May Purchase Avg Balance) | $ 815,661 | $ 408,198 | |
| 8 | $ 750,000 | | |
| 9 | $ 750,000 | | |
| 10 | $ 1,376,706 | | |
| 11 | $ 750,000 | $ 750,000 | 750000 |
| 12 (Sum of avg bal on "outstanding" mrtgs) | $ 815,661 | $ 852,629 | $ 964,925 |
| 13 (paid interest) | $ 28,957 | $ 28,957 | $ 28,957 |
| 14 | 0.919 | 0.880 | 0.777 |
| 15 (deductible interest) | $ 26,626 | $ 25,472 | $ 22,508 |
| 16 (nondeductible interest) | $ 2,331 | $ 3,486 | $ 6,450 |
| deductible interest fraction | 0.92 | 0.88 | 0.78 |
Note by the way, that TT Online doesn't let me do ANY of this - the standard method in TT online is to just naively sum the total balances of my two partial-year mortgages and gives me a horrid result for deductible interest. How am I supposed to enter values into TT online that remotely get me the correct deduction amount here? At the very least I should be getting the deduction from the interest rate method, even if TT isn't taking into account the literal "outstanding" balance instructions.
Thanks again for your help and expertise.
