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jkahn
Level 1

Purchased new home in 2019, but did not sell old home till 2020

My wife and I purchased a new home in 2019, and moved to that home in November 2019.  We did not sell the old home until March 2020 - it was vacant between November 2019 and March 2020.  The combined principal of the two houses is over $750k.  My question is how to treat the mortgage interest and whether we need to indicate anything about the change of our primary residence in November (note: both houses are in the same town).  

 

1 Best answer

Accepted Solutions
NCperson
Level 15

Purchased new home in 2019, but did not sell old home till 2020

for the old house, i agree with the math. (but I think you meant 1/1/19 as the $426,000 balance - not 1/1/20. 

 

but for the new house, take a 12 point average of the ending balance of each month..... months 1-7 will each be a zero, then month 8 is  742,500..... look up months 9, 10, 11 on your monthly statements and then month 12 is 740,000.  The average for the year will be somewhere around $310,000. 

 

add the $310,000 to the average ~$423,000 and you are at around $733,000 for the average for the year.  then everything is deductible. 

 

the instructions in the middle of page 13 of publication 736 state: 

 

Statements provided by your lender. If you receive monthly statements showing the closing
balance or the average balance for the month, you can use either to figure your average balance
for the year. You can treat the balance as zero for any month the mortgage wasn't secured
by your qualified home

 

note the bolded sentence.  The $750,000 limit is not predicated on the 12/31/19 balance, it's the AVERAGE balance for the year.  

 

You will have a problem in 2020 since the January, February and March balances are clearly well above $750,000 (as both mortgages are outstanding) and that will affect the average for the year.  But same approach for 2020, that mortgage on the house you sold will have eight zeros as part of the 12 point average for 2020. 

 

Then in 2021, you should be fine, since the remaining mortgage is below $750,000.  

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9 Replies
MarilynG1
Expert Alumni

Purchased new home in 2019, but did not sell old home till 2020

No, you don't need to indicate the change of your primary residence.

 

The Mortgage Interest Limitation applies to the total of your mortgages on first and second homes.

 

Even if your deduction is limited, you didn't pay much Mortgage Interest on the second home you purchased in November 2019, so it shouldn't affect your return greatly.

 

Click this link for more info on Deducting Mortgage Interest. 

 

You can review the calculations on the Mortgage Interest Limitation Worksheet. 

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jkahn
Level 1

Purchased new home in 2019, but did not sell old home till 2020

Here's the problem I am facing:  Average mortgage principal on original home (mortgage prior to 2017) is about $420k.  Bought new home at the end of August 2019. Average principal on new home was $740,000.  Obviously this pushes us over the $750k limit.  Full year of interest on old house was about $19,500, and the total interest paid on new house was $9400.  But after running through the worksheet, it seems the max deductible is only $18,685, which is less than I would have deducted if just ignoring the new house entirely.  I feel there is something I am missing (e.g. some way to pro-rate the calculation since the new house was only owned for 1/3 of the year).  

 

It seems reasonable that all of the interest on the 1st house from Jan-September should be deductible, and the interest from September - December should have the 750k limit applied, but it does not seem like it works this way.  Am I missing something?

 

NCperson
Level 15

Purchased new home in 2019, but did not sell old home till 2020

take the ending balance for each month for each mortgage from your servicer statements to strike an average over the 12 months.  a lot of months may be zero.   

 

see publication 936 / middle of page 13

 

Statements provided by your lender. If you receive monthly statements showing the closing
balance or the average balance for the month, you can use either to figure your average balance
for the year. You can treat the balance as zero for any month the mortgage wasn't secured
by your qualified home

 

run the average on each mortgage through the table on page 12 and complete the ENTIRE page. 

 

it wasn't clear to me when you sold the 1st house, but if that was simultaneous with the purchase of the new home, your average for the year is going to be under $750,000 and all the interest will be deductible.

VictoriaD75
Expert Alumni

Purchased new home in 2019, but did not sell old home till 2020

The limit on the amount of interest has changed under the Tax Cuts & Jobs Act. The interest deduction pre-TCJA has been available to qualified mortgage debt up to $1 million ($500,000 married filing separately).

 

Through 2025, the TCJA has lowered the amount of qualified mortgage debt to $750,000. For qualified mortgage debt incurred on or before December 15, 2017, the $1 million limit remains in place, thus "grandfathering" existing mortgage debt.

 

You need to indicate to the software that they are not combined and need to be limited.

 

For desktop versions:

  • In Forms view, locate and click on Tax & Int Wks on the left from the forms list
  • On the form, scroll to Mortgage Interest Limited Smart Worksheet
  • Click on NO to the right of the question, Does your mortgage interest need to be limited

For online versions, after entering the 1098 interest information, continue through the screens and TurboTax will ask you if the interest needs to be limited.

 

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NCperson
Level 15

Purchased new home in 2019, but did not sell old home till 2020

@VictoriaD75 while I agree the limit is $750,000 it's based on the AVERAGE balance, not the ending balance.

 

So let's say I have a $200,000 mortgage and sell the home on June 30 (let's not worry about amortization for simplicity).  Then I purchase a new home on July 1 where the mortgage balance is $800,000 for the last 6 months of the year.

 

Over the course of the year, I had $500,000 of AVERAGE mortgage debt outstanding.  All the interest on both mortgages is tax deductible because the AVERAGE for the year is below $750,000. 

 

Yes, in 2020, I have a problem because the AVERAGE for the year is $800,000 (assume no amortization) which exceeds the $750,000 limit.

 

Please see publication 936 and the table on page 12 as well as the explanation of how to approach line 7 which is noted on  page 13. 

 

 

jkahn
Level 1

Purchased new home in 2019, but did not sell old home till 2020

The old house was not sold until 2020 (unfortunately).  Here is the timeline:

old house:

   - mortgage last refinanced: 6/1/17

   - Jan 1, 2020 principal balance: $426,874

   - Dec 31, 2019 principal balance: $ 418,054 (house not sold until March 2020)

   - total interest paid in 2019: $19,557

 

New House:

   - purchased 8/29/2019

   - Initial principal mortgage balance at purchase: $742,500 (on 8/29/19)

   - Dec 31, 2019 principal balance: $740,252

   - Total Interest pain in 2019: $9,412

 

If I take the average for the year, it is (($426874 + 418054)/2) + (742500 + 740252)/2 = $1,162,717.  It seems that the calculations assume that these mortgages were on the same house, which is not the case.  When running through the worksheet in publication 936, I end up with the ability to deduct only 64.5%.  When applied to the total interest paid, it means I am only able to deduct a total of $18,685, which is less than the interest paid on only the old home.

 

I feel like there should be some way to run a weighted average considering the new home was owned for only 4/12 of the year, but I have been unable to find a way to do that.  You mention I can treat the balance as 0 for any month the new mortgage did not exits (i.e. jan 1 - August 29) - where did you find that method of calculation for the average balance?

NCperson
Level 15

Purchased new home in 2019, but did not sell old home till 2020

for the old house, i agree with the math. (but I think you meant 1/1/19 as the $426,000 balance - not 1/1/20. 

 

but for the new house, take a 12 point average of the ending balance of each month..... months 1-7 will each be a zero, then month 8 is  742,500..... look up months 9, 10, 11 on your monthly statements and then month 12 is 740,000.  The average for the year will be somewhere around $310,000. 

 

add the $310,000 to the average ~$423,000 and you are at around $733,000 for the average for the year.  then everything is deductible. 

 

the instructions in the middle of page 13 of publication 736 state: 

 

Statements provided by your lender. If you receive monthly statements showing the closing
balance or the average balance for the month, you can use either to figure your average balance
for the year. You can treat the balance as zero for any month the mortgage wasn't secured
by your qualified home

 

note the bolded sentence.  The $750,000 limit is not predicated on the 12/31/19 balance, it's the AVERAGE balance for the year.  

 

You will have a problem in 2020 since the January, February and March balances are clearly well above $750,000 (as both mortgages are outstanding) and that will affect the average for the year.  But same approach for 2020, that mortgage on the house you sold will have eight zeros as part of the 12 point average for 2020. 

 

Then in 2021, you should be fine, since the remaining mortgage is below $750,000.  

View solution in original post

jkahn
Level 1

Purchased new home in 2019, but did not sell old home till 2020

Thanks, this is extremely helpful!  

 

Now that the average balance calculation is figured out, there's one more caveat to throw in there.  The sellers of the new house rented it back for 60 days following closing.  Their rent equaled the amount of taxes, insurance and mortgage interest during that time (i.e. my carrying cost).  

 

I have read that there are a couple ways to handle this: 1) treat it as a rental properly for 60 days, reporting their income, and the expenses are the tax, insurance and interest during that period; or 2) effectively adjust the cost basis on the house down by the amount of their "rent", in which case I would realize taxes due upon the sale of the home (as part of the capital gain).  Thoughts on which is the best approach?

JohnB5677
Expert Alumni

Purchased new home in 2019, but did not sell old home till 2020

I would suggest the Number (1) rental option.  It more closely represents what actually happened.

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