How do you split Mortage interest between the rental portion and sharing payment with a girlfriend?

[loboacounting]

I have a client that has 1.6 million mortgage principal. Part of the home rented out and other portion the client and girlfriend live. how do I go about portioning the mortgage principle and the mortgage interest? Do I use the Square footage to find out the percentage spit for the rental portion of mortgage interest and principle and then I use the whatever my client and his girlfriend paid throughout the year and if the principle split is more then 750,000 I disallowed some?

Example

10,000 square feet and 1,000 square feet is rented out.

Mortgage principle is 2 million.

And the mortgage interest is 50k.

And client paid personally 25k

And girlfriend  paid personally 15k

My understand of this is that 5000 of the mortgage interest will be deducted on the schedule E and 200,000 of the mortgage will be removed from the mortgage principal equation making it 1.8 million. For the client portion of mortgage principle is $1,125,000 which some of the 25k will be disallowed since its other 750,000 which make the mortgage interest that is deductible on his return is $16500. For the girlfriend her mortgage principle portion is $675000 which means all the 15k is deductible since its below 750K.

I’m I handling this situation currently and is my calculation in the example correct?  Also please feel free to include any information that you feel is important.

[TaxMonkey · Accepted solution]

Is the girlfriend an owner of the house, either on title or an equitable owner?

When did the mortgage originate, was it in 2018?

[loboacounting]

Yeah, The girlfriend's name is listed on the 1098 with client. Also they got the house in April of 2018

[TaxMonkey]

OK assuming that they are 50 / 50 owners, and someone actually paid for all of the mortgage interest ($25k + $15k = $40k. ) Also you state that mortgage principal is both $2M and $1.6M so there is that.

Divide the interest into qualified residence interest and excess interest.  The QRI will be $750k / $1M * $25k for each the BF and GF = $18750.  The QRI will then be allocated between the rental portion and personal portion.  So QRI schedule A - $16,875 and QRI schedule E $1,875.

The excess interest allocated to the rental property will be deductible on the schedule E - so 10% of the $6,250 or $625 will go to each of their schedule E - for a total schedule E interest of $2,500.

You seem to imply that they paid different amounts of interest - $25k + $15k = $40k.  So I don't know which part is off, but I would probably ignore it.

[loboacounting]

Sorry for using different numbers. the example is a hypothetical. I didn't want to use the actual numbers because it will involve a lot more math so i picked simple numbers. Also is splitting mortgage interest basic on  owner percentage or how much each person actually paid? also how would i handle this situation if only my client is make money off the rental portion of the house?

[TaxGuyBill]

The mortgage interest deduction is based on the amount paid, not by ownership percentage.

[ToBeRich]

1. If I understand correctly, you are saying the excess interest(the portion > $750k), is eligible for schedule E deduction, correct?
2. The client and his GF has $750k combined QRI, instead of $1.5M. So it is per property, instead of per person, is that correct?
Thanks in advance!

[TaxMonkey]

Yes, excess interest is still deductible on the rental portion.  The $750k limit is per taxpayer, not per property.  Thank you Ninth Circuit!

https://www.thetaxadviser.com/issues/2016/dec/mortgage-interest-deduction-limit-per-taxpayer-basis.h...