@Carl We are on the same page with regard to how interest is split. My question is with regard to accounting of principal payment (which then would decide the interest calculation for the next year for each of main house and ADU),
Here are repayment ordering rules from 1.163-8T
B. REPAYMENT ORDERING RULES.
We generally know whether a particular debt has been repaid, but when the debt
has been used for multiple purposes, we need to know which portion has been
repaid. When a debt has multiple characters, the regs provide the order of
repayment. General order (for a mixed purpose loan). Under Treas. Reg. 1.163-
8T(d)(1), debt is treated as repaid in this order:
a) First Allocated First Paid – If there is more than one
expenditure in the same category, they are treated as repaid in the
same order in which they were allocated.
b) Qualified Residence interest is “personal” interest under the
-8T regs. So presumably rule b) applies to allocate repayment
between personal and residence interest. However Pub. 936 has a
mini set of ordering rules:
( The publication needs to be updated. Home equity debt should be
replaced with Personal. )
1- Personal
2- Investment or passive activity
3- Rental passive activity w/ active participation
4- Former passive activity
5- Trade or business
