Can you use average outstanding mortgage principal over course of year if paid down significant amount early in year bringing balance below 750k cuttoff for deduction?

[eric-mihelc]

For example, if outstanding mortgage = $1MM on January 1st, 2020 and interest = $20k during year, you could only deduct ~3/4 of it. However, if you paid down -$500k of that mortgage on January 15th, the vast majority of interest you paid through year was below the 750k cutoff, yet striking the balance as of January 1st wouldn't adjust for that.

[LenaH · Accepted solution]

No. Generally, to fully deduct mortgage interest, the principal would have to be below $750,000 at all times during the year.

The average of first and last balance method can be used if all of the following apply:

1. You didn't borrow any new amounts on the mortgage during the year. (This doesn't include borrowing the original mortgage amount.)
2. You didn't prepay more than 1 month's principal during the year. (This includes prepayment by refinancing your home or by applying proceeds from its sale.)
3. You had to make level payments at fixed equal intervals on at least a semi-annual basis. You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate.

I have attached IRS Figure A for additional information in determining when your mortgage interest is fully deductible. 

Publication 936

[eric-mihelc]

Great info, ty @LenaH. Looks like using interest paid divided by mortgage rate might be the better option based on publication 936.