I have 2 home. Primary house principal -765k , Int- 21K. House2 secondary -princ- 1.24M , interest- 6K. When I add 2nd house my house1 credit is removed. How to handle ?

[KrisD15]

In what year were the loans originated? 

[lviki]

Loan1 is 2021 and second is 2024.

For now I did my own calculations. I added 11 month of interest for 1st loans. Used 750k/765K * interest of 11 months.

For last month I captured interest of 12th month. Second loan was started in November month of 2024 . It had higher interest for December month. So I used 750/1240 * December month.  This gave me total of around 22k.

Turbo tax was calculating incorrectly. It was taking average balance from second loan which was about 1239000. This was reducing my interest to 10.3k. I adjusted it to 22K based on above calculations

 I hope this calculations is right.

[zomboo]

No, you're not doing it right. If the balances you provided were the actual average balances, your interest deduction would be approximately 750K / (765K +1240) * (21K + 6K) = 10.1K. So it seems TT is doing it correctly.

[lviki]

This calculation by Turbo tax is wrong. The algorithm of TT is incorrect. If I don't add second home my interest calculated is 750/765 *21000 which 20400.

So TT is penalizing me for having a second home for which I paid more interest. 

How come my actual interest goes down when I actually paid much more interest. 

This is definitely a big where TT does not handle 2 homes correctly. 

I had first house for whole year. Second house was bought in November. First house was pending sale and was actually sold in January. 

I am sure that IRS cannot do such injustice and definitely handles it better. That's why I calculated interest based on months where I claim 11 months for 1st house and 12th month for 2nd house. 

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[zomboo]

The interest deduction calculation I did in my previous response is what is provided in pub 936. And you're right, it sucks for taxpayers that sell their home and buy another. Pub 936 and Turbo Tax both treat this situation as if you had a primary and second home during the year instead of trading in one home for another. However, there is an accepted method of calculating your deductible interest that is not in Pub 936 that will benefit you. I don't know why I didn't tell you about it before. It's called the Exact method and it will get you the amount of interest deduction you figured for the home you sold but not the interest on the $6K for the home you bought.

With the Exact method, you figure the average balance on the first home and subject it to the $750K limit: 750K/765K * 21,000 = 20,588 (just like you did). You need to understand that since the average balance on this mortgage is over the $750K limit, you have used up all of limit on this mortgage and can not deduct any of the interest on the new home this tax year.

You will need to manually enter the interest amount in Turbo Tax when you get to the 'Your deduction is being limited' page.

[lviki]

Thanks. On the adjustment screen I put in my calculated interest. Instead of calculating it for only 1 home , I did monthly calculations. Took 11 month interest for 1st home and 12th month from second home. For all the calculations I kept max 750k interest limit. However while calculating I took individual house average balance. Mathematically that calculation is right and it give me best result with interest going up to 22k. 

[Mike9241]

PUB 936 speaks to average balance but without clearly defining how to compute the average when a loan is taken out during the year.  I think an acceptable method would be for the first home to average the balance at the beginning and end of the year by totaling those amounts and dividing by 2.

for the second house, take the beginning balance and the year-end balance and divide by 2

multiply this by the number of months you paid interest in 2024 and divide by 12

divide 750 by the sum of the two average balances and multiply the total interest paid

so you might have something like this'

average balance 1st house 750K average balance second house $100K because it was taken out late in the year

deductible interest would be 750 /(750+100)* 27 

[zomboo]

Pub 936 is intended to provide guidance on applying the tax code to the mortgage interest deduction. It provides some of the acceptable methods of calculating the average mortgage balance and applying the deduction limit. Pub 936 does not, however, address the situation where a taxpayer sells their main home and buys another. These taxpayers are stuck with the instructions in Pub 936 that apply for taxpayers with both a Main and Second Home which are generally unfavorable if you sold one home and bought another. However, Pub 936 is not absolute and any reasonable alternative method of applying the mortgage limit may be used.

@lvikiYour method is not reasonable because you are applying the $750 limit to each mortgage individually which exceeds the limit. @Mike9241 Your method is reasonable in my opinion but you can't overlap the monthly balances. This is because you can only deduct the interest paid while the home is a qualified home and only one home can qualify as the main home at any one point during the year. Home1 was the qualified main home up to moving into Home2, lets say Dec 2024, when it became the qualified main home.

I believe it is reasonable to sum up the monthly balances of Mortgage1 for Jan through Nov with the Dec monthly balance for Mortgage2 and dividing by 12 to get your average mortgage balance. Then divide 750K by this average balance to get the % interest deductible. Only sum up the interest paid for Mortgage1 Jan through Nov with the interest paid for Mortgage2 in Dec and multiply by the %.

[lviki]

Let me shares results running all three methods discussed here. Taking sample on below data

Home1 average balance - 765k

Home1 total interest for 12 months - 21000 

Home1 11 months interest - 19500

Home2 average balance -1240k

Home2 December interest - 6000

My method - 

11 months average balance calculation with Loan1. - 

(750/765) * 19500 = 19117

1 month average balance calculation with loan2-

(750/1240)* 6000 = 3629

Claimable interest= 22746

Zoombo method - let's consider hypothetically that Jan to 11 months sum is 765* 11 = 8415

Dec month avg balance = 1240

Sum of above 2 = 9655

Avg balance= 9655k/12 = 851k 

Total interest = 19500+ 6000 i.e. 25500

Claimable interest = (750/851) * 25500 = 22473

Mike9241 method - 

I paid loan1 for all 12 months. So avg balance for Loan1 will be 765k

For loan2- ( 1 month * 1240k )/12 = 103

Total avg balance = 765 + 103 = 868

Total interest considering overlap month= 27k

Claimable interest = (750/ 868) * 27000= 23329

Claimable interest ( non overlapping month) = (750/868)* 25500 = 22033

In all 3 methods Mike non overlapping method give best results.

@zomboo- My and your methods are very close. I am considering each loans individually for the duration I am using interest on that month. It does not exceed 750 as I count interest only for that duration. 

For e.g. let's take simple example. if my first loan avg balance was 750 for 10 months and let's say I closed it in October.. interest let's say 20k for this loans. I can claim all 20k as it was under 750k

Now I take second loan of 1500k and pay interest of 10k. I can claim 750/1500 * 10= 5k

Total 25 k

Your method = ( 750*10 + ( 1500 +1499) )/ 12 = 312

Total balance as per your method= 750+312= 1063

Claimable= (750/1062) * 3000 = 21186.

21186 is totally wrong here

I hope above example makes it clearer why method is better and more accurate. 

I am also inclined towards overlapping method of Mike as it seems reasonable as I paid overlapping interest. I feel it needs some tweaking though to get the accurate results.

[zomboo]

We have been discussing alternative reasonable methods to the guidelines in Pub 936. Not only must these alternative methods be reasonable, they must also meet the intent of the tax laws for deducting mortgage interest. In my opinion, you want to go beyond the reasonable and ignore the intent of the tax laws in order to claim a higher deduction. In any case, be prepared to defend the method you choose.

Please keep these points in mind: 1) You cannot apply the $750K balance limit individually to each mortgage. This could cause the $750K balance limit to be exceeded. 2) You cannot claim a deduction of the interest for both mortgages at any time during the year. This is the same as saying you had two main homes during that time. 3) Please check the calculations in your examples. There are several mistakes.

[lviki]

Can you please point to the mistakes in calculation?

In my method I am not claiming interest from both house at a same time. I am only claiming interest for 11 month from home1 and 1 month from home2. This is not unreasonable. 

[zomboo]

No, you are not claiming the interest from both houses at the same time but you are applying the $750K limit to each. Please try to understand that the $750K limit applies to the total of all your mortgages. The average balance of $765K on House1 already exceeds $750K. So it's all used up and the remaining limit for House2 is $0. You don't get to deduct up to another $750K on House2.