When I rent out a room in my primary residence, is the 750k cap on the mortgage interest deduction applied to my mortgage total before or after I calculate the interest for my itemized and rental expense deductions?
Example:
Total mortgage: 1,000,000
Total interest: 40000
Portion of rental: 25%
If the cap is applied before:
Capped mortgage = 750,000
Total mortgage interest = 750,000 / 1,000,000 * 40000 = 30000
Itemized deduction = 30000 x 75% = 22500
Rental expense deduction = 30000 * 25% = 7500
If the cap is applied after:
Personal-use mortgage = 1,000,000 * 75% = 750,000 (which is less than the limit)
Rental-use mortgage = 1,000,000 * 25% = 250,000
Itemized deduction = 40000 * 750,000 / 1,000,000 = 30000
Rental expense deduction = 40000 * 250,000 / 1,000,000 = 10000
What would be the correct way to calculate the deduction? Thanks!
