Home Mortgage Interest Deduction - Bought new primary home, sold old one in same year

[Atlas2023]

I have read a recent post on this situation and still don't understand how to calculate the adjustment for mortgage interest for the situation of buying a new home and selling the old one in the same year. Here is my situation:

Bought new home on August 10, 2022. New mortgage of $1,115,000 ($750k limit applies to deductible interest). Mortgage interest 1098 form for new home says $14,816.63 was paid in interest for new home in 2022.

Old home (bought in May 2016, so $750k mortgage interest limit did not apply) was sold on November 14, 2022. Mortgage balance was 824,950.57 and mortgage interest paid for 2022 was $25,902.03.

No points were paid on either mortgage.

If you have experience with Table 1 of Publication 936, can you please comment on how I can go about calculating the qualified loan limit and deductible home mortgage interest for the current year? I am confused reading the guidance. Thank you!

[DMarkM1]

First for the loan taken out in 2016 there was a limit for the deduction for loan balances over $1M.  When you use Table 1 to calculate your deductible home mortgage interest you will see that your qualifying loan limit will be based on the first loan.  It will be the lesser of your average loan balance for that debt or $1M (Table 1, lines 2, 6 and 11).  In your scenario that will be the $820K figure. 

Using general numbers here is how to figure your deductible home mortgage interest paid for two or more mortgages.

Loan 1 = beginning balance on 1 Jan 2022 (box 2 1098).  $850,000; ending balance (payoff $825,000)  Average mortgage balance with payoff in Nov (11 months).   825K + 850K/2 = 837.5K  (11/12) = 767,708 (Table 1 lines 2, 6 and 11)  Interest paid: 25,000

Loan 2 = beginning balance (box 2 1098) - 1,115,000; ending balance 1 Jan 2023 (first statement 2023) 1,110,000 with 4 months interest paid (Sep-Dec) Average balance  1,115K + 1,110K/2 = 1,112,500 (4/12) = 370,833 (Table 1 line 7).   Interest paid 15,000

Add those average balances together 767,708 + 370,833 = 1,138,541 (Table 1 line 12) 

Based on 2016 loan date the qualifying loan limit is lower of $1M or 767,708 (Table 1 line 11).  Therefore 767,708/1,138,541 = .6743 (Table 1 line 14)

Total interest paid:  40,000 (Table 1 line 13) x .6743 = 26,972  Deductible interest paid (Table 1 line 15). 

[Atlas2023]

Thank you for the answer. I went through Table1 on form 936. Your answer makes logical sense to me but I have not figured out where the guidance is to use a months/year multiplier to prorate the average loanbalance.

What I don't understand from the answer to my original question is how I can apply 11/12 months to the first house average balance and 4/12 months to the second house average balance. I don't see that kind of proration in the form 936 guidance, but I think I am missing it because if the proration does not exist, I would only be able to deduct $17,468.305 of interest, which is lower than just deducting house 1's interest and totally ignoring house 2's interest. Can you please point me to where I can find this proration of months owned in the guidance?

My calculations are as follows:

1) House 1, bought in 2016 (so mortgage balance for mortgage interest deduction is all interest below $1 million mortgage balance), had an average mortgage balance of $834,723.59. This house was owned until November 14, 2023. This house was owned for 318 days, or 11 months, 14 days. The interest for the year was $25,902.03.

2) House 2, bought on August 9, 2022 (so mortgage balance for mortgage interest deduction is mortgage interest below $750,000 mortgage balance). Beginning mortgage balance was $1,115,000 and ending was $1,110,375.15, so the average balance was $1,112,687.575.  The interest for the year was $14,816.63. Between August 9th and the end of the year, the house was owned for 145 days, or 4 months, 23 days.

If the proration does apply, then I think I would be able to deduct the following:

Average balance of loan for house 1, is $834,723.59. If I prorate it to reflect the months owned, it would be (11/12)*$834,723.59=$765,163.29.

Average balance of loan for house 2 is $1,112,687.575. Prorated to reflect the months owned (4/12), would be (4/12)*$1,112,687.575=$370,895.85.

Add those average balances together $765,163.29 + $370,895.85 = $1,136,059.14 (Table 1 line 12)

Based on 2016 loan date the qualifying loan limit is lower of $1M or $765,163.29 (Table 1 line 11). Therefore $765,163.29 /$1,136,059.14 = 0.6735, or .674 rounded to the nearest 3 decimal points (Table 1 line 14)

Total interest paid: $25,902.03+$14,816.63= $40,718.66 (Table 1 line 13) x .674 = $27,444.38 Deductible interest paid (Table 1 line 15).

In sum, can you please point me to the guidance on how to prorate the average loan balance by the months owned? And in this case, would the proper number of months be 11/12 and 4/12? Thank you!

[DMarkM1]

Your calculations and prorations (11/12 and 4/12) all appear correct.  In Publication 936 see examples 1 and 2 in the Average Monthly balance section (here and extracted below) to see proration examples. 

Example 1.

In 1986, Sharon took out a first mortgage of $1,400,000. The mortgage was a 7-year balloon note and the entire balance on the note was due in 1993. She refinanced the debt in 1993 with a new 30-year mortgage (grandfathered debt). On March 2, 2022, when the home had a fair market value of $1,700,000 and she owed $500,000 on the mortgage, Sharon took out a second mortgage for $200,000. She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. During 2022, her principal payments on the second mortgage totaled $10,000.

To complete Table 1, line 7, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. The January and February balances were zero. The March through December balances were all $180,000 because none of her principal payments are applied to the home acquisition debt. (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000].) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Therefore, the average balance of the home acquisition debt for 2022 was $150,000 ($1,800,000 ÷ 12).

Example 2.

The facts are the same as in Example 1. In 2023, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. The balance of the home acquisition debt remains $180,000 for each of those months. Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Therefore, the average balance of the home acquisition debt for 2023 is $179,750 ($2,157,000 ÷ 12).