First for the loan taken out in 2016 there was a limit for the deduction for loan balances over $1M. When you use Table 1 to calculate your deductible home mortgage interest you will see that your qualifying loan limit will be based on the first loan. It will be the lesser of your average loan balance for that debt or $1M (Table 1, lines 2, 6 and 11). In your scenario that will be the $820K figure.
Using general numbers here is how to figure your deductible home mortgage interest paid for two or more mortgages.
Loan 1 = beginning balance on 1 Jan 2022 (box 2 1098). $850,000; ending balance (payoff $825,000) Average mortgage balance with payoff in Nov (11 months). 825K + 850K/2 = 837.5K (11/12) = 767,708 (Table 1 lines 2, 6 and 11) Interest paid: 25,000
Loan 2 = beginning balance (box 2 1098) - 1,115,000; ending balance 1 Jan 2023 (first statement 2023) 1,110,000 with 4 months interest paid (Sep-Dec) Average balance 1,115K + 1,110K/2 = 1,112,500 (4/12) = 370,833 (Table 1 line 7). Interest paid 15,000
Add those average balances together 767,708 + 370,833 = 1,138,541 (Table 1 line 12)
Based on 2016 loan date the qualifying loan limit is lower of $1M or 767,708 (Table 1 line 11). Therefore 767,708/1,138,541 = .6743 (Table 1 line 14)
Total interest paid: 40,000 (Table 1 line 13) x .6743 = 26,972 Deductible interest paid (Table 1 line 15).
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