No, the percentage should be broken down in days for your first home. Days the property was used for personal home divided by the number of days in the year would equal your personal portion of mortgage interest for the first home, and the remainder would be rental percentage. You can also use your annual statement to see exactly what interest was paid each month of the year.
I agree with @Carl that the first part of the year would be applied first to the maximum threshold for home mortgage interest on Schedule A and the remainder amount would be from the second personal home you purchased later in the year to meet the total threshold allowed.
Next your formula would be correct except you are now trying to figure out how much of the second home mortgage interest you can use. So your formula should be reversed:
The outstanding mortgage on the rental immediately before you converted it should be used. $750,000 minus the mortgage balance on the first home (using your example) $400,000 leaves $350,000 balance that can be used from the second home. ($350,000 divided by $500,000). This would give the mortgage interest for the second home.
- First home mortgage interest plus second home mortgage interest = allowable mortgage interest on Schedule A. The remainder paid is not used.
- IRS Publication 936 - Worksheet 1, page 11
@vinodr777
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