I bought a second home in the middle of 2017 which made my total loan exceeds 1 million. When I was trying to figure out my deductible interest payment following Pub 936, I got confused:
Say I own a primary home throughout entire 2017, with an average mortgage balance of 0.5 million. I bought a second home on Dec 2017 with 1.5 million loan. According to the instructions on Pub 936, I should put 2 million at line #9 of the worksheet ("total of the average balances of all mortgages"), and then I would only quality for 50% of interested paid in 2017. However, that sounds very unfair since during most of 2017, my loan is under 1M and should be fully deductible.
Should I ignore Pub 936 and work out the deductible interest month-to-month?
Follow the worksheet on page 11. You will need the beginning and ending balances of each loan and be certain to keep a copy of the worksheet for your records should the IRS inquire.
Let me use a simple example:
- I kept my first home throughout 2017 with and average balance of 0.5m. This part is clear.
- My second home was bought on December, so only have one interest payment with principal balance of 1.5M.
What is my average balance of the year?
I can see two different ways of calculating it:
Approach 1: avg(home1) = 0.5M, avg(home2) = 1.5M / 1 => avg(total) = 2M
Approach 2: avg(both homes) = (0.5*12 + 1.5) / 12 = 0.625M