2 houses - calculate mortgage interest deduction with both houses having mortgages > $750,000

[arnieg123]

Hello,

I own 2 houses.  Both houses have mortgages greater than $750,000 and were purchased after 2018.  I would think that I would calculate the total allowed interest by calculating the allowed interest on each house based on $750,000, then add the resulting figures together.  For example, if the first mortgage is $800,000, multiply the interest by the factor (750,000/800,000) or .9375 to obtain deductible interest.  Similarly for the second mortgage - suppose it is $1,000,000.  (750,000/1,000,000) = .75, so multiple the interest on the second house by .75.

So as an example, if the first property had interest of $10,000, the allowed deduction is $9,375 (.9375 * 10000).  Similarly, if the second house had $20,000 in interest, the allowed interest is $15,000 (.75 * 20,000).  I would think the total deduction would be $15,000 + $9,375, or $24,375.

However, this is not what is happening in TurboTax.  When I enter the data for the second mortgage, the allowed interest deduction actually decreases.   How is it calculating the interest deduction?  Or better yet, how should it calculate the deduction?  

Thanks for your help.

[MarilynG1]

The IRS allows several methods for calculating the Mortgage Interest Deduction.

If you're using TurboTax Desktop, you can make entries directly on the Mortgage Interest Worksheet using the method that is best for your situation.  Be sure to document how you arrived at your numbers. 

Click this link for discussion on Various Way to Calculate Mortgage Interest. 

Here's a link to IRS Publication 936, Home Mortgage Interest Deduction. 

[zomboo · Accepted solution]

The method you have outlined is simply not allowed. Calculating the interest deduction separately on each mortgage and adding the amounts together exceeds the $750K total mortgage deduction limit. You must add the average balance of each mortgage together and apply the $750K limit to this sum.

Since you say that when you enter the data for the second mortgage the deduction allowed is reduced, it may be beneficial for you to use the Exact method which, in your case, applies the $750K limit to the interest on the first mortgage and none of the interest on the second mortgage. However, you can't pick which mortgage is first and which one is second. The first mortgage is the one with the earliest origination date.

[arnieg123]

Thank you.  Exactly what I needed to know.

[Raul2025]

Hi,

I'm in a similar situation. I have a condo and a single-home with mortgages. This year I starting using the condo as my office and moved into the single-home. The single-home is 50% for personal use and the other 50% are rooms I have rented. 

The combined mortgage balance during FY2024 was 1,300,000 (more than the 750K limit). After following the instructions on IRS Pub. 936, my limit is 57.69%. (line 14)

My combined mortgage interest paid during the year 2024 was $60,000 So my deductible mortgage interest is $34,615 (the result of 60K*57.69%) 

My question is about the remaining mortgage interest in IRS Pub. 936, Line 16, in my case the value is $25,385. The IRS publication mentions that this is considered personal interest, and it's not deductible unless all or part of any mortgage proceeds for business, investment, or other deductible activities. These activities are listed in Pub. 936 Table 2. The activity "deductible interest incurred to produce rents or royalties" is there. 

With this information, because I'm renting rooms, can I include the value in IRS Pub.936 Line 16 (the remaining $25,385 in my example) as part of my rental expenses? If yes, how I do this in TurboTax?

Thanks!

[zomboo]

Your situation is not similar to the original subject of this post. To increase your changes of getting the help you need, I suggest you start a new thread. You should include dates on when you started renting rooms in the single family home and when you started using the condo as an office. There are also criteria that must be met in order to deduct the office expenses. You will need to figure the percentage of space you are using as an office in the condo. I doubt you can claim the entire condo as an office.

Your situation is complicated and I am not a tax expert. With that in mind, this is what I think. The $34,615 deductible mortgage interest you figured using Pub 936 would be the amount of mortgage interest you can deduct on schedule A if you didn't rent part of one house and claim office usage in the other. It will be reduced by the percentage of each home not used as your main or second residence. Of the interest not deductible on schedule A, you will be able to deduct the percentage of the total mortgage interest paid on each home equal to the percentage allocated to rent and business use respectively.

[Raul2025]

Thank you for your clear response @zomboo. I'll definitely open a new thread with my question as you advised.