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IRS Pub 936 — multiple mortgages each exceeding deduction limit
IRS Publication 936 ("Home Mortgage Interest Deduction") has a worksheet (Table 1) that helps you calculate how much of your mortgage is tax deductible. However, if you have a number of mortgages for your primary home and whatever you declare as your second home, the way it assumes the calculation doesn't make entire sense.
As an example:
- Home 1 has a Mortgage 1 taken out on it.
- Home 2 has a Mortgage 2 taken out on it. Home 2 was purchased using the proceeds of both Mortgages.
- Home 1 was sold, and Mortgage 1 was paid off.
- All of this happened in the same calendar year (let's say 2022).
- Let's say both mortgages each recorded an average balance of USD1.5M (so we're apples-to-apples there).
- Mortgage 1 accrued $80,000 of interest at a much higher interest rate than Mortgage 2, where Mortgage 2 accrued $40,000 of interest.
The example presents a situation where either mortgage would far exceed the maximum $750,000 mortgage limit, and either would be sufficient for maxing out the deduction. But the language in Table I and the Publication seems to imply that you have to take all mortgages into calculation. This is a problem:
- Per Table I, Mortgage 1 on its own would allow $40,000 of deductible home mortgage interest (750K/1.5M = .5 * 80K).
- Per Table I, Mortgage 2 on its own would allow $20,000 of deductible home mortgage interest (750K/1.5M = .5 * 40K).
- Both Mortgages together would allow only $30,000 of deductible home mortgage interest (750K/3.0M = .25 * 120K).
- Effectively, Mortgage 2 is watering down the calculation, I would say unnecessarily.
So my question is: are we required to follow the implication that all of the Mortgages must be in the calculation and reported that way?
More specifically — and ultimately my direct question — do taxpayers have the choice to only report Mortgage 1 and subsequently get the $40,000 of deductible home mortgage interest instead of $30,000?
(Secondarily, as the taxpayer, don't we ultimately have the power to declare what we want to declare as a deduction?)