Since I last posted, I have reviewed Tax Reg 163(h), the Omnibus Budget Reconciliation Act of 1987, and the Tax Cuts and Jobs Act of 2017. What struct me most is that these regulations do not provide information on mortgage balance averaging methods or how to handle a mortgage on a main home and another on a second home.
Mortgage averaging methods appear to have first showed up in the temporary reg 163-10T and included the exact and simplified methods as well as first and last balance, interest paid divided by interest rate, and the statement balance methods. Pub 936 included all of these except for the exact method. However, memorandum PRESP-120431-11 (2011) argues that the exact method still applies until the IRS explicitly states otherwise provided the $750,000 mortgage limit is used. I guess because Pub 936 didn’t rule it out.
I do need to make a correction in my calculation of applying the exact method as if they were secured by the same home. It should have been:
Deductible Interest: ($750K -$458K)/$725K = 40.3% of $12,465 = $5,023
Total Deductible Interest: $12,048 + $5,023 = $17,071
I claimed mortgage interest on the condo mortgage in its entirety because it the first mortgage chronologically in an effort to make it fit into the 163-10T model which is based on multiple mortgages secured by the same home.
For tax year 2024, the approach would be the same. Of course, if you applied this method first to your main home:
$750,000-$725,000 = $49,860
$25,000/$458,000 = 5.5% of $12,048 = $663
Deductible Interest = $49,860 + $663 = $50,523
This is much better right? But we are stretching the 163-10T method even more to justify a higher refund. Remember this method was left out of Pub 936, is not defined when you have mortgages secured by different homes, and the experts saying ‘I guess it’s okay if you reinterpret the limit’ since Pub 936 didn’t rule it out by name.
I now believe the intent of reg 163(h) and 163-10T is that the exact method should be applied to the combined balances of your main and second homes and not applied separately. This is only slightly better than the Pub 936 method:
$750,000/1.183M = 63.4% of $24,513 = $15,541 (simplified using $750K limit)
$725,000/1.183M = 61.3% of $24,513 = $15,026 (Pub 936 using $725K limit)
Remember, the TCJA sunsets in a couple of years, and the limits go back to the $1M level unless congress intervenes.
