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New Member

# Why should buying a second home in December reduce the allowable mortgage interest on the first home?

I'm helping a friend with two houses understand the mortgage interest deduction limit and she raised a good point on calculating average mortgage balances according to the IRS rules in Pub 936.  Let's say each house is secured by a \$600,000 mortgage and the interest for the year is \$20,000 on each.  If they are owned all 12 months, the total interest is \$40,000, but only \$33,333 is deductible because the total mortgage of \$1.2 million is over the \$1 million limit.  Fine if you bought the second home in January of the tax year.  But let's say you buy it in December and only have 1 month of interest, say \$1667.  According to the IRS, the average mortgage balance is still \$600,000 on each, but now the limit imposes a deductible amount of \$18055 (\$21,667/1.2).  If she has waited until January 1 of the next year to close, she could have deducted the full \$20,000 on the first home.  That just seems wrong to be penalized like that.  Is this just a quirk in the regulations?

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Expert Alumni

## Why should buying a second home in December reduce the allowable mortgage interest on the first home?

You need to calculate the average balance of each loan to determine the aggregate average balance of the 2 loans. This average will determine whether the total mortgage balance is above the limit of \$1 million. You do not add up the full balance for the full year.

The average balance of each loan for the year is obtained by adding the monthly average balances and dividing the total by 12. In your example, the second loan only has a balance of \$600,000 for one month and its average balance for the year is \$600,000/12 = \$50,000. To do the calculations, you'll need the monthly balances for each loan.

https://www.irs.gov/pub/irs-pdf/p936.pdf

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New Member

## Why should buying a second home in December reduce the allowable mortgage interest on the first home?

Well, if that's the case, then how do you explain these two sections from Pub 936: (1) in the flowchart on page 3, it asks the question, "Were your (or your spouse's if married  ling a joint return) mortgage balances \$1,000,000 or less (\$500,000 or less if married filing separately) AT ALL TIMES during the year?"  The answer in my example of owing the second home for only 1 month is NO, since they were over \$1,000,000 in December, implying a limit; and (2) on page 12, it states: "For each mortgage, figure your average balance 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."  For the second home owned for one month, this statement suggests \$600,000/1 = \$600,000.
Expert Alumni

## Why should buying a second home in December reduce the allowable mortgage interest on the first home?

The calculation applies for EACH mortgage. Let's assume for simplicity that the mortgage balances remain unchanged for the full year. The average for the first mortgage is \$600,000 for the 12 months of the year. The balance of the second mortgage is \$600,000 for the month of December. So the average of both mortgages is \$600,000 for 11 months and \$1,200,000 for December. And the average for the year is [(\$600,000 x 11) + \$1,200,000] / 12 = \$650,000.
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New Member

## Why should buying a second home in December reduce the allowable mortgage interest on the first home?

Hmmm.  That seems like the way it should be and how I think it should be.  I understand the logic, but that question about being under \$1,000,000 at all times during the year troubles me.
Level 3

## Why should buying a second home in December reduce the allowable mortgage interest on the first home?

I found this question because I also found the publication 936 confusing, and the answer here helped me, yay!

@Prof-X At least in the 2019 publication, the flowchart just says to go to Part II to determine the limits. Filling out Part II sometimes gives the result that you can deduct all the interest. So I think the flowchart is just a rough check to see if you need to bother to do a more detailed determination of interest deductibility. I agree there are some pretty confusing parts in pub 936 though. Did the IRS complain about your friend's return?

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