Home mortgage interest deduction - Bought and sold home in the same year

[shsandeep]

I am trying to calculate the home mortgage interest deduction accurately because I bought and sold a home in the same year, 2022. Pub 936 on IRS website is confusing and doesn't cover my situation. I got multiple 1098s from my lender with these scenarios -

1. Home 1 - original loan was taken in Feb 2016 

2. Home 1 - Loan was refinanced in 2019

3. Home 1 Sold and loan was paid off ~$580k in August 2022

4. Home 2 Bought in June 2022 - Initial loan balance was $1.9M and ending balance was $1.2 as of Dec 2022.

Question 1 - If I follow the instructions to calculate average of the loans, it should be adding up the start of the year 2022 loan balance ($580k) and end of year 2022 balance ($1.2M) which comes down to ~$900k. Is this correct?

Question 2 - Is my limit $1M or $750,000 because the original loan was taken in 2016 but was then refinanced in 2019?

Question 3 - Assuming its $900k for question 1 and $750k for question 2, ($750k/$900k = 83.33% of the mortgage interest amount paid) is deductible?

I appreciate your support in answering this.

[DMarkM1]

You are on the right track, however, you have overlapping months of outstanding loans so you are unable to use the first month on one loan and last month of second loan.  You will need figure separate loan balances and add them together.  

Question 1 - No, not correct use the below example to calculate your average loan balances.

Using general numbers and reference Publication 936, Table 1.

Loan 1 = beginning balance on 1 Jan 2022 (box 2 1098).  $585,000; ending balance (payoff $580,000)  Average mortgage balance with payoff in Aug (8 months).   585K + 580K/2 = 582.5K  (8/12) = 388,333 (Table 1 lines 2, 6)  Interest paid: 15,000

Loan 2 = beginning balance (box 2 1098) - 1.9M; ending balance 1 Jan 2023 (first statement 2023) 1.5M with 6 months interest paid (Jul-Dec) Average balance  1,900K + 1,500K/2 = 1,700,000 (6/12) = 850,000 (Table 1 line 7).   Interest paid 15,000

Add those average balances together 388,333 + 850,000 = 1,238,333 (Table 1 line 12) 

Question 2 - 750,000.  Since your average balance for the 2016 loan is below 750K the qualifying loan limit is 750,000 (Table 1 line 11).  

Question 3 - Therefore 750,000/1,238,333 = .6056 (Table 1 line 14)

Total interest paid:  30,000 (Table 1 line 13) x .6056 = 18,169 Deductible interest paid (Table 1 line 15). 

[shsandeep]

Thanks @DMarkM1 ! I appreciate you taking the time for such a detailed response.

So, to confirm, in our example here, would $18,169 be the number I enter under 'Adjustments' box in TurboTax?

[DMarkM1]

Yes, using the numbers I did, that is correct.  You would substitute your numbers in the formulas to arrive at your deduction.