Solved: Mortgage interest deduction cap for first year
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tpenn
Level 1

Mortgage interest deduction cap for first year

Hello,

 

I purchased a house in 2019, with a mortgage amount that is over the 750k limit. It's clear to me how to calculate the average balance for 2020, where the loan exists for 12 months out of the year. I'm a little less sure about what to do for 2019.

 

Publication 936 page 13 says "[y]ou can treat the balance as zero for any month the mortgage wasn't secured by your qualified home" when calculating the average mortgage balance. It sounds like I should be treating the months in 2019 before the loan was originated as having 0 balance.

 

For example (to use round numbers) if the loan was $2M, and taken out in July, the average balance would be around $1M ( [$0 * 6 months + $2M * 6 months] / 12 months), not accounting for a small part of the principal paid off. I would then be able to deduct 75% of the interest paid in 2019 (750k limit / 1M average balance).

 

Would this be the correct way to calculate this? Thank you!

1 Best answer

Accepted Solutions
DavidD66
Employee Tax Expert

Mortgage interest deduction cap for first year

No, that's not how you should calculate it.  It's no that "the mortgage wasn't secured by your qualified home" for the first 6 months, the mortgage didn't exist.  You only use the months the mortgage existed.  In your case, if you ignore the principal, your average mortgage balance was $2,000,000.  You can deduct 37.5% of your interest.   

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2 Replies
DavidD66
Employee Tax Expert

Mortgage interest deduction cap for first year

No, that's not how you should calculate it.  It's no that "the mortgage wasn't secured by your qualified home" for the first 6 months, the mortgage didn't exist.  You only use the months the mortgage existed.  In your case, if you ignore the principal, your average mortgage balance was $2,000,000.  You can deduct 37.5% of your interest.   

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

tpenn
Level 1

Mortgage interest deduction cap for first year

Thanks for taking the time to reply! That makes a lot more sense -- I thought my previous calculation seemed too good to be true!

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