Mortgage interest limit for 2 homes

[espencerito1]

I can't seem to get a clear understanding of what the $750,000 mortgage balance limitation (post-2017 purchases) applies to for the Schedule A mortgage interest deduction when you have two homes.

Here's my scenario:

• Home A is my primary residence, purchased in May 2024, with a mortgage balance of $650k.
• Home B I lived in for 4 months in 2024 prior to purchasing Home A, was purchased in 2018, with a current mortgage balance of $300k. Home B is now a rental (I meet the 14 day or 10% of rental time personal use requirement).

What does the mortgage interest limit apply to?

• The total of the mortgages for Homes A and B together ($750k/$950k = 79% limitation), or
• each home individually (full deduction on both houses, where Home B deduction is 1/3 of the mortgage interest due to personal use, 2/3 is used as deduction on Schedule E)?

If the limit applies to the total mortgages of both Home A and B together

The mortgage interest on Home A ($27k) is higher than the limited deduction of the total of the mortgages for Homes A and B together ($25k). Can I choose not to include the mortgage interest deduction on Home B and deduct the full amount of Home A mortgage interest?

[Mike9241]

there is no absolutely right way to compute the average mortgage balance. that's for the $750 limit for the year. 

one way would be to add up the month-end mortgage balance for home A to this add the month-end mortgage balance for the months that home B was not a rental  (not necessarily the same as the months you lived in it)  take the total and divide by 12. if this is under 750K your home mortgage deduction is not limited.  it would be the interest on A plus the interest on B times the months it was not a rental divided by 12  (or use days it was not a rental to prorate the interest). The rest would go to the rental. 

another way is to use the average at the beginning and end of month rather than month end.

[NCperson]

@espencerito1 rather simple... it's the average monthly balance.  you are well below $750k. 

$650K /12 *8   + $300k /12* 4 months = $533k.  It'll actually be less than that due to amortization since the origination of the mortgage.  All the interest is deductible. 

then there is the 8 months interest related to the $300k mortgage that goes on Sch E. 

[zomboo · Accepted solution]

You can't compute the average balance for the primary home (home A) as $650K /12 *8 = $433K because it wasn't a qualified home for 12 months. It's average would be around $650K for 2024. You can compute the average for the second home (home B) as $300k /12* 4 = $100K since it is classified as a qualified home (not a rental) for all of 2024. This puts the total average balance for both homes at or below the $750K limit.

However, you don't have to calculate the average balances and apply Table 1 in Pub 936 at all (see the instructions for Table 1 at the bottom of Pub 936 page 10). Since home A had no balance for Jan - April and the interest for home B is applied on schedule E for May - Dec, the total balance for both mortgages didn't exceed $750K at any point in 2024. All the interest on home A plus the interest paid on home B for Jan - April is deductible as qualified residence interest on schedule A.

[NCperson]

@zomboo  

"You can't compute the average balance for the primary home (home A) as $650K /12 *8 = $433K because it wasn't a qualified home for 12 months."

" Since home A had no balance for Jan - April"

are these conflicting statements?  if Home A is zero for 4 months and $650 for 8 months, isn't that $433k as the average for 12 months?   

[zomboo]

@NCpersonNo, they are not conflicting statements. Home A didn't have a balance for Jan - April but you don't compute the average over 12 months with $0 for Jan - April. Home A wasn't a qualified home for Jan - April so you have to take the average over the 8 months it was a qualified home.