I bought a new home on April 19, 2023 and sold my previous home a week later, on April 26, 2023. The payoff on the old mortgage was about $406k (interest at 2.5% was $4,128 for the year), the mortgage on the new home was $520k (interest at 5.875% was $18,652 for the year), and I use the married-filing-joint status. I referred to IRS Pub. 936 for this topic.
I can deduct interest on mortgage principal up to $750k. My mortgage balances for the year never exceeded $520k, except for one week when I had a combined mortgage balance of about $920k.
Logically, all of my mortgage interest should be deductible -- except perhaps the interest on the excess of ($520k + $406k = $926k) over $750k for one week. (That would make ($926k - $750k) * 2.5%/52 = $85 non-deductible.)
What method can I use to determine my average mortgage balance?
- The "average of first and last balance" method doesn't seem to work -- it just averages the balances on the first and last days of the year when the home was secured by the loan. So that would force me to add average balances of about $410k and $510k and would yield the illogical result that my average mortgage balance during the year was $920k.
- The "interest paid divided by interest rate" method requires that the home be secured by the loan for the entire year. That's unfortunate, because this method yields average balances of $165k and $317k, for an average of $483k -- that's a very logical result.
- The "statements provided by your lender" method seems like the best option. The instructions indicate, "You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home." That suggests that I would take the total month-by-month balance for each of the two loans and divide by 12 (since that's how I would incorporate a zero balance for months when the loan wasn't in force). The instructions go on to say, "You can figure your average balance for the year by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year." Can I read these instructions to direct me to add the monthly balances for each of my two loans for each month they were in effect and divide the total by 12 (since that's the number of months that the home was a qualified home -- even though each individual mortgage wasn't in effect for 12 months?
That's the only way that I can find to interpret the rules in Pub. 936 to allow me to get to a rational result.
It doesn't make any sense to me that I would get the full deduction if I had a $500k loan for the full year or if I had a $500k loan for Jan-June and another $500k loan for July-Dec, but if the two loans overlap for a week I have to treat that as if I had a $1,000k loan all year.
Should I rely on the "statements from your lender" method to allow me to deduct all my interest, should I be more conservative and just use logic to reduce my deductible interest by $85 for the one-week period as outlined above, or should I do something completely different?
Sorry for the complicated question. Thanks in advance for your help!
