mortgage interest limited

[1kathygn1]

My daughter and son in law purchased a new home 12/18/18 for $480,000 with a mortgage of $456,000).  Their original home did not sell until 2/28/19 for $450,000 (payoff of mortgage was $370,627).  They wouldn't be limited in 2019 to the amount of interest they could claim would they?

[JohnB5677]

Your daughter and son in law are allowed to deduct the mortgage interest they pay on as much as $750,000 of personal residence debt on a first and/or second home.

[NCperson]

HOWEVER, you are to use the AVERAGE BALANCE of each mortgage 

see IRS publication 936 / page 11 

also: from page 13: 

You can treat the balance as  zero for any month the mortgage wasn't secured
by your qualified home. 

so the AVERAGE on the $370,000 mortgage is only $185,000

all the interest is deductible since you are below $750,000 when using the AVERAGE MORTGAGE BALANCE

[eandktiernan]

This is probably a dumb question, but if I sold a primary home in 2022,  why does the amount of the loan at the start of 2022 ($375K) get added to the amount of the loan for a new primary home ($650K) and thus trigger the interest deduction limitation.  The amount of the 1st loan at the end of 2022 was $0.  And the new mortgage REPLACED the old mortgage... so why isn't that the amount that the limit is based on?  At no time in 2022 did I exceed a loan balance of $650K.

[PatriciaV]

Yes, the average of the two loans is added together to determine your mortgage interest limitation. However, TurboTax is limited in what situations it can handle when the total is over the limit. In this case, you should calculate the limitation percentage yourself in case you need to override the amount calculated by the program.

Here are the steps:

1. For each loan, add the amount shown on Form 1098 to the ending loan balance as of January 1, 2023 (this year) and divide by two.
2. Multiply that average by the number of months the loan was active and divide by twelve. (Ex: 375,000 x 6/12) This is your weighted average for the year.
3. Add those two averages together. This is your mortgage total for the year.
4. Compare this total to the Qualified Loan Limit ($750,000 if filing jointly, $375,000 filing jointly).
5. If your total is under the limit, all your mortgage interest is deductible.
6. If your total is over the limit (unlikely), divide the limit by your total (ex: 750,000/1,020,000). Multiply your mortgage interest by this percentage to determine how much is deductible.
7. Now return to the mortgage interest (1098) section of TurboTax.
8. Click Done at the bottom of the 1098 list.
9. Follow the prompts to answer the additional questions.
10. On the page "Your Mortgage Interest is Limited," enter the amount of deductible mortgage interest you calculated above.

This amount should be reported on Schedule A if you itemize your deductions.

@eandktiernan