$1MM Qualified mortgage limitation with respect to personal --> rental property conversion

[wrangler18]

I have a property that was used as follows in a tax year:

Jan 1st - Sep 30th (9 months) : personal use

Oct 1st - Dec 31st (3 months) : rental use

I have a mortgage on this property for about $1.25MM.  I cannot deduct mortgage interest on the portion of the mortgage greater than $1MM for personal use.  (IRS Pub 936 Home Mortgage Interest Deduction).  But I believe I can use the entire balance (1.25MM) when calculating a mortgage interest expense for my rental property (Schedule E).  

I believe the way Schedule A and Schedule E interest expense should be computed is as follows.  

1098 reported interest = $42,033.

Schedule E rental interest expense  =$42,033 x 3 /12 = $10,508.

Schedule A interest expense** = (1MM/1.25MM) * $42,033 * 9/12 = $25,220 

**(Assume the average balance = $1.25MM to simplify the calculations)

So in effect, when calculating interest expense for my rental I use the entire loan balance.  I when calculating interest for my personal use, I limit the balance to $1MM.

Does this make sense?

Thanks!!!

[Critter · Accepted solution]

Perfect sense ... you are quite correct. 

[Carl]

You're spot on with the interest split. Below is some additional data to better clarify things in other areas. When it comes to "clarification" there are a few things where the program falls short. So the below will help.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.