Hello,
I have a mortgage over $750,000. I understand that you can only deduct the interest up to $750,000, but how do you calculate the principal to use in the calculation? Do you use the loan amount as of Jan 1? Dec 1? Or an average? For example, your loan may have a balance of $900,000 on Jan 1 and $880,000 on Dec 1. What value do you use when calculating the percentage of interest to deduct - 750,000/900,000 or 750,000/880,000?
Thanks
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I am surprised no one has responded to your question. You probably figured it out yourself by now. But if you haven't: The percentage of your total interest that you can deduct is calculated (average acquisition debt)/(average mortgage balance). Acquisition debt is the balance of the loan that was used to buy or improve the the home. If this is the original mortgage (not a refinance) all of the mortgage is acquisition debt.
There several ways to calculate the average balances described on page 12 of Pub 936. You can add the beginning and ending balances together and divide by 2: ($900,000 + $880,000)/2 = $890,000. To figure the percentage of interest after applying the limitation, divide $750,000 by $890,000 and round the result to three decimal places: $750,000 / $890,000 = 0.843 = 84.3%
Yes, it is an average. TurboTax will calculate your average mortgage balance. You enter the mortgage balance as of Jan 1st when you enter the 1098. So for a 2023 tax return and 1098, you will enter the mortgage balance as of Jan 1, 2023. See Pub 936 for details on how it is calculated.
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