How to calculate " Average loan balance" for a mid...
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moneymatters
Returning Member

How to calculate " Average loan balance" for a mid-year loan?

Hi All,

 

Turbo tax is not calculating the average loan balance automatically and wants me to supply the average loan balance.  Pub 936 is very confusing and all examples talk about a loan which was there in the beginning of the year but I'm wondering how do I calculate the Average Loan Balance for a loan that was taken out during the tax year? NOTE: This is a loan to buy a new home and not a mixed use/heloc type loan. I don't have any other loans.

 

Scenario: Loan of $1.1M taken out on July 1, 2019 and assuming the balances for each month after july was 1.09, 1.08, 1.07, 1.06, 1.05, 1.04.

 

Calculation 1: Average Loan Balance = (0 + 0 +0 + 0 + 0 + 1.10 + 1.09 + 1.08 + 1.07 + 1.06 + 1.05 + 1.04) / 12 = 0.624 M  = 624,000 which is under the 750,000 limit so entire interest is deductible.

 

Calculation 2 = 1.10 + 1.09 + 1.08 + 1.07 + 1.06 + 1.05 + 1.04 / 7 = 1.07 M which is over the limit so only 750000/1070000 * (Interest paid) is deductible. 

Which of these methods is correct to calculate the Average loan balance?

3 Replies
moneymatters
Returning Member

How to calculate " Average loan balance" for a mid-year loan?

Someone please help, this is too confusing and I cannot find a direct answer to this question.

BillM223
Employee Tax Expert

How to calculate " Average loan balance" for a mid-year loan?

Use your first method.

 

Example #1 on page 12 of Pub 936 applies to you. Note that the home equity loan was for only ten months in the tax year, so the total of the loan balances is added using the balances from ten months, which is then divided by 12.

 

Next year, since you will have all 12 months, you will exceed the $750k limit.

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moneymatters
Returning Member

How to calculate " Average loan balance" for a mid-year loan?

Thanks so much for the reply,  I forgot to mention this is the original loan to buy the home itself and not a HELOC/second loan which is what the Example 1 on page 13 is for. Does that calculation still apply? If not, how do I calculate the avg loan balance for a new (and only) loan taken out to buy the house.

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