@DMarkM1Thanks for the response, I appreciate you sharing your expertise!
> @TBain I refer to Publication 936, the Average Mortgage Balance section, Examples 1 and 2. Both annualize the mortgage debt.
If I understand correctly, the difference between that example and this situation is that Sharon from the example owned the property for all 12 months of the year, whereas that is not the case here. Pub 936's Statements Provided By Your Lender section says "dividing that total by the number of months the home secured by that mortgage was a qualified home during the year" and I believe a home is not a qualified home during the months you don't own it. Or am I thinking about this wrong in some way?
> Further, using an example of two loans. One home that was sold in May with an average balance during only those months of 600,000 (below 750) along with a home purchased in July for 605,000 so an average balance of 600,000 for only July - Dec. Never was the indebtedness over 750,000, but if they are not annualized the aggregate is going to be 1,200,000 and limit the deduction.
I agree that the instructions in Pub 936 result in a limitation that seems incorrect in the case of non-overlapping mortgages. But I'm not convinced that makes the divide-by-12 method a valid alternative in all cases, since that leads to loans over $750k (or multiple properties that sum to over $750k) held for short periods of the year being treated as unlimited even though the mortgage balance for that period of time is above the limit. The only approach that seems correct in all these scenarios is dividing the interest paid across different periods of the year, computing the sum of average balances for each period and applying the limitation to each period. Then mortgages over $750k are properly capped, as are short periods when multiple properties are owned whose mortgages sum to over $750k.
