Mortgage interest limited to 750k debt

[GKH]

Hi community,

My son bought a home in 2017 and turned it into a rental last year 10/2023 since he bought a new home with his girlfriend.  1098 has both names on it, but only her SSN. If they are splitting it 50% each, mortgage interest, points can be split.  But my question is do I split the outstanding mortgage balance as well when inputting it on turbo tax.  

Just realized IRS Iimits mortgage interest deduction up to 750,000 mortgage DEBT. For singles would it be 375K?

Do I use 1/2 the mortgage amount (taken out with girlfriend)  to calculate if he’s within the 375k debt balance? When putting it on turbo tax, I am putting in 1/2 amounts and explaining it in the explanation part.  I was just wondering if everything on 1098 posts ans 1/2 amounts as well? I understand he can deduct the rental expenses, portion of mortgage, taxes etc from 10/23on, but is the prior months interest payments lost on his former home?

Any help would be greatly appreciated!  Thank you!🙏 

[KrisD15]

The mortgage interest paid on the house turned rental is entered as a rental expense, and does not factor into your son's mortgage balance going forward. If the new house was purchased AFTER the first home was turned into a rental, use the higher balance for 2023. The balance on the first house OR his half on the second house. 

If the second house was purchased before the first was turned into a rental, you will need to average the first house balance with his half of the second house, (so the overlapping months would be the sum of the first balance and his half of the second)

The balance limit for the Home Interest Deduction is per person, not property. If your son owns half and pays and claims half the interest, he would only report his share (half) of the mortgage balance. 

He does need to be on the Deed and mortgage note. 

IRS PUB 936

[zomboo]

The prior months interest payments on the home converted to a rental and half of the interest payments on the new home are deductible on schedule A for your son. The amount of the mortgage limit depends on the average balances. Since the rental home mortgage was originated in 2017, it is subject to the $1,000,000 limit. The actual limit in your son's case comes down to the Maximum of (Minimum of (Average Rental Home Balance,$1,000,000) or Minimum of (Average New Home Balance,$750,000)).

Technically, the averages are computed over 12 months with $0 entered for the inactive months; October-December for the rental. Turbo Tax doesn't do it this way but will compute the averages for you using a simplified method approved by the IRS that is usually in the taxpayer's favor.