Average Mortgage Balance Determination and Interest Deduction in situation where two mortgages are paid off after a sale in same year

[dukegbw3]

I am trying to use IRS publication 936 Table 1 to make sure I am deducting the correct amount of mortgage interest.

I bought Home A with Mortgage A in 2015.  

I bought Home B with Mortgage B in November of 2023. 

I sold Home A on February 29, 2024 thus paying off Mortgage A.

I used the proceeds from Home A to pay off Mortgage B on March 1, 2024. 

2024 Total Interest from Mortgage A: $2,262.36

Mortgage A balance on Jan 1 2024: $355,513.62

2024 Total Interest from Mortgage B: $29,355.28 

Mortgage B balance on Jan 1 2024: $1,551,250

(The balance wasn't that much lower when I sold maybe a couple thousand dollars for each mortgage.)

I believe Turbo Tax is using the "Average of first and last balance method" (with the last balance being 0$) to compute average balances. When I (and turbo tax) do this the result comes out roughly the same $24,873.  TurboTax is asking me if values that I get are different. Should ($0) be the number used for last balance or is there something I'm missing here?  I'm afraid I'm doing this wrong and to not missing out on deducting more interest?

[zomboo]

The ending balance used in the Average of First and Last Balance averaging method is defined in Pub 936 as: The balance as of the last day of the year that the mortgage was secured by your qualified home during the year
(generally, December 31). In my opinion, your mortgage is no longer secured on the day it is paid off. This means the last day the mortgage was secured is the day preceding payoff. Consider that using $0 as the ending balance artificially inflates your % deduction over what you received on both mortgages on your 2023 return.

[dukegbw3]

Thank you. Got it this makes sense. Also, it's becoming apparent that there's not another way to calculate average mortgage balance (by monthly statement or otherwise) to allow a higher deduction. Also, if I'm reading correctly, I can't split the mortgages and use all interest from the pre-2017 mortgage even though it had a million dollar cap, and then use the $750,000 cap for the 2023 mortgage by itself?

Just seems weird that carrying a second mortgage even for a short period of time simultaneously actually lowers the amount that you can deduct even if you're already over the cap and it's more total interest in aggregate.

Thanks again for your help. I was about to deduct way too large of an amount. 

[zomboo]

Yes, you can deduct all of the interest on mortgage A but your $750K limit for mortgage B is reduced by the balance amount applied to mortgage A. This is called the exact method. If we assume the balances you provided are the averages, the amount of interest you can deduct on mortgage B is ($750,000 - $355,514) / $1,551,250 * $29,355 = $7,456.  Add this to the interest from mortgage A: $7,456 + $2,262 = $9,718. Sucks, I know.