Mortgage Interest Deduction for 2 homes

[sfciver]

Hi,

I acquired a second home this year that became my primary residence for the last 4 months of the year,  but I've held my previous residence for personal use.   My loan on my original home was acquired in 2019 and exceeded $750K.   My new purchase has a much smaller loan under the $750K cap but at a higher interest rate.  How do I approach calculating my deduction between the homes?      

Thank you!

[zomboo]

You need to pick one as your main home and one as your second home. Since your new purchase was your main home at the end of the year, it makes sense to designate this home as your main home, especially if you can and are planning to deduct all of the points paid on this mortgage this year.

Your deduction will be limited to the interest on $750,000 if the sum of the average balances of both loans is greater than $750,000.

[sfciver]

Thanks.   So if I designate my new home with a higher interest rate as my primary residence, can I deduct all the interest from the new home first and then allocate the remaining cap to the second home?   

So say I have $100K new loan at 7% and $2M old loan at 3%, can I deduct all the interest from the 100K loan and then deduct the remaining 650K of cap from my previous loan?  

[zomboo]

No, it doesn't work that. In the example you gave, your interest deduction is limited to $750,000/2.1M = 35.7% of the total interest paid on both loans ☹️