You would be able to deduct the full interest on the months that your mortgage did not exceed $750,000. For the few months that it did exceed the $750,000 limit, your mortgage interest would be limited to just the interest on the $750,000 for those months.
Example. January through August you had house A with mortgage of $725,000, selling it on August 31. July 1, you bought house B and moved into it with a mortgage of $500,000 and owned and lived in that house through the end of the year.
- January through June, you could deduct the full interest on house A
- Sept 1 through December 31, you could deduct the full interest on the $500,000
- For July and August you could take the full interest on the $500,000 for and then you could include the interest on $250,000 of mortgage A
If your interest on Mortgage A was $1,500 for July and August, then you would be able to deduct 33% (250,000/750,000) of that interest or $500 plus the full interest on Mortgage B.
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