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Level 3

# Calculation of 2nd home mortgage deduction over 750K

Hi,

My primary house was purchased in 2016 with 500K mortgage loan today.

I am considering to purchase a 2nd home for the expanded family with 400K mortgage loan.

Of course, the interest today is much higher than it was in 2016. So how much interest can I deduct for federal tax?

1. I can deduct the interest generated from both loans and then can deduct: total interest * 750K/(500K + 400K)

2. I can deduct the primary home (purchased earlier) interest and then part of 2nd home interest: primary home interest + ((750K - 500K) / 400K) * 2nd home interest.

Which one is correct?

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2 Replies
Level 15

## Calculation of 2nd home mortgage deduction over 750K

1 is okay but actually a little more refined - see below. there are other methods that can be used but I don't know if Turbotax can do those calculations

see IRS PUB 936 starting on page 10

mortgage interest paid times \$750,000 divided by the sum of the average balance of the two mortgages.

so if you paid off \$100,000 on the first and none on the second the average balance, under one method, of the first would be \$450,000 added to the \$400,000 average balance of the second.

if you ever refinanced the mortgage on the first home that will complicate matters.

Level 15

## Calculation of 2nd home mortgage deduction over 750K

You are allowed to deduct mortgage interest on your main home (where you live most of the time) and on one second home, up to a combined limit of \$750,000.  The calculation shown in IRS publication 936 Table 1 aggregates your interest without regard to priority or interest rate.  In other words, your method 1, more or less.

There are three methods to determine your average balance for the year.  The easier one is to take the average of the first and last month mortgage balance.  Suppose the mortgage on home 1 is \$500K on January 1 and \$490K on December 31, and the mortgage on home 2 is \$400K when you buy the home and \$395K on December 31.  Your average balance is \$892.5K so your deductible interest percentage is 0.840 (84%, rounded to three significant digits).  There is a second method which is harder to explain that uses your interest payments to figure out the deductible percentage.  The third method is to figure your average mortgage balance for the year by taking the average from all 12 monthly statements for both mortgages.  This is what you will want to do for 2022, since your balance for more than half the year is well under \$750,000 (since you have not bought the second home yet).

What you ask in #2 is can you prioritize one house over the other.  I don't believe you can do that, there is nothing in the instructions that suggests it.  I tried to find it in the actual law but I couldn't one way or the other.  The instructions aggregate your interest without regard to your preference in deducting one or the other.