Calculating mortgage interest deduction in year buying and selling

[beperman1]

Hi everyone, 

I am trying to finish my taxes but I'm confused on my mortgage interest deduction. I feel like turbo tax has under calculated my number as I got something completed different though I understand there are multiple ways to calculate this and how you do it may differ based on your specific circumstances. I spoke with multiple people at turbo tax who were using a computer to message someone else during our conversations and I feel like did not answer my questions at all. They were giving me A WAY to calculate this but not the only way, or maybe not the most 'tax advantageous' way for this situation.

Home #1:

Owned 157/365 days (0.430)

Mortgage interest $5,397.28

Outstanding mortgage principal $318,517.02

Home #2:

Owned 206/365 days (0.564)

Mortgage interest $41,959.21

Outstanding mortgage principal $1,330,000

Points paid #1,662.50

TT is giving me a populated deduction of around $21-22,000--doing it a different way I am seeing deduction of around $41,000 which is a significant difference and why I want to make sure I'm not screwing up. I asked CHAT GPT to do it (because why not). Two of the times it gave me number close to what I calculated and once it calculated close to what TT auto populated--when I asked why, it said they used different methods and both are ok.

The way I calculated:

I used the average mortgage balance weighted by days owned to do my calculation.

Home 1: 157 days owned/365 = 0.430

Home 2: 206 days owned/365 = 0.564

Home 1 balance $318,517.02 x 0.430 =$136,962.32

Home 2 balance $1,330,000.00 x 0.564 =$750,120.00 

Total home 1 +2 balances = $887,082.32 avg balance

Since avg balance over amount allotted calculation to determine percent of interest usable for deduction

750,000/887,082.32=0.845

Calculating mortgage interest deduction 

Home 1 interest paid $5,397.28 + home 2 interest paid $41,959.21 + points paid on purchase $1,662.50 =$49,018.99

Total interest $49,018.99 x percent able to be deducted 0.845= $41,421.05 mortgage interest deduction for taxes

[RobertB4444]

I can't really argue with your math.  I think the catch is the percentage you're using based on the days that you owned each home - a) I'm not sure it's ok and b) it's certainly not something TurboTax could calculate.  

I would just tell you to make sure that you have thoroughly documented everything including this equation and set it aside in case there are questions later.

[NCperson]

for the mortgage on the old home, use a 12 point average and use zero for the months that the mortgage had been paid off.

for the mortgage on the new home, use a 12 point average and use zero for the months prior to the home purchase.

you can get the monthly balances from the servicer statement.

this approach is supported by "statements provided by your lender" on page 15.

Once you have the answer use the worksheet on page  14 to determine what is deductible 

Since this is from the IRS publications, it is the "only way".

https://www.irs.gov/pub/irs-pdf/p936.pdf 

[beperman1]

If I understand that section I would use the end month balance (effectively the principal balance of the following month)--for the month I paid the loan off (June 6th), would I use the beginning of the month principal balance for that month of the calculation?? I assume I shouldn't use 0.

[PatriciaV]

As long as you are consistent and end up with a total of 12 months of mortgage balances, your calculations should be accurate.

Example:

Old Mortgage: X + X + X + X + X + 0 + 0 + 0 + 0 + 0 + 0 + 0 = 5X

New Mortgage: 0 + 0 + 0 + 0 + 0 + X + X + X + X + X + X + X = 7X

Average Mortgage = 5X + 7X / 12

[NCperson]

@beperman1 you are using the balance as of the end of the month in all cases, so for June, use zero.