For what it's worth, I jumped on a call with a TurboTax expert a couple months ago and these are the steps we took off his advice:
- Calculate how much of the total mortgage can be deducted against the $750k limit
- In your example of a $1M total, this would be $750k (or 75%)
- Multiply the 75% against the total interest paid on your 1098 as the total deductible amount
- Take the total amount deductible and split that between your Schedule A and Schedule E based on your square footage calculation (75%/25% in your example)
So unfortunately in your example, you do "waste" $250k in non-deductible interest. I would love to know if you heard something different from a different accountant, because I ended up not taking full advantage of my interest paid as deductible as well.
