Mortgage interest deduction limit and renting out a room of primary residence

[chantat]

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!

[DianeW777]

Apply the cap after. You are not limited on the amount of mortgage interest that applies to the rental portion of your mortgage (room in your primary residence).  Calculate the rental portion of your deduction on the full amount of mortgage interest paid.

For your home section you must use the required limitation after reducing the overall mortgage interest paid by the deduction used for the rental portion.

Manually enter the information in both the rental section and the itemized deduction section instead of letting TurboTax do the calculations.  This becomes difficult with the various calculations needed to apply the correct deductions.  You should also adjust the full amount of the mortgage in the itemized deduction section to remove the percentage that should apply to the room being rented.

[chantat]

To make sure that I understand correctly, the below is the correct way to calculate the deduction?

Example:

Total mortgage: 1,200,000

Total interest: 40000

Portion of rental: 25%

Personal-use mortgage = 1,200,000 * 75% = 900,000 -> 750,000 (due to the cap)

Rental-use mortgage = 1,200,000 * 25% = 300,000

Itemized deduction = 40000 * 750,000 / 1,200,000 = 25000

Rental expense deduction =  40000 * 300,000 / 1,200,000 = 10000

[Carl]

When renting out a part of your primary residence, there is one screen that will ask you the "WRONG" question for your specific and explicit scenario. The question reads: "Percentage of time I used this item for this business in 2020 (e.g.; 80%)"

What you need to enter in that block is the percentage of floor space, not the percentage of time. The program already knows the percentage of time, based on the "in service" date you entered on a previous screen.