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.