750K debt mortgage interest limitation question

[Grateful2002]

The MFJ taxpayer purchased a home 903k in 2022. He also has a second home 318k purchased in 2016. Originally, I thought that the 750k debt mortgage interest limitation is per home, but seem, this is per total per taxpayer, correct?

Seems, when I enter both loans in the deductible home mortgage interest worksheet, the system combines them both to 1.2M, then applies the limitation percentage. Does that sound right? Am I missing something?

[sjrcpa]

In general it is correct, but for home purchased in 2022 the loan wasn't outstanding all year so that's too high.

Use average monthly balances. The software should have input fields for number of months outstanding.

[Grateful2002]

It does have the input for months loan outstanding and it calculates as 7 months after I input the mortgage origination date. 

But then I have to enter beginning of the year balance, which would be what? I entered as zero. And then its asking for borrowed in 2022. I entered as 903k. I have to enter amount of debt used to buy. I entered 903k. Then it flows to "average" as 903k as well. The escrow statement is showing purchase price as 903k. And the 1098 is showing outstanding balance as 903k as well. And it does calculate as 903K. It does not account for  the 7 months outstanding in the calculation, seems. So am I doing something wrong?

[sjrcpa]

Yes.

Think about it. Interest on the first loan is deductible in full for the months before buying the new home.

After that, interest on $750K mortgage debt is deductible.

Do a spreadsheet, work it out with a pencil.

[Grateful2002]

Right.

The software should account for that 7 months I would think. Maybe, I am not entering the numbers where they should go.

So you are saying I should take average of that 903K. If we take the average and 7 months the loan was outstanding, it would be $451,500, correct? So I do I enter $451,500 instead of 903K under "borrowed in 2022"? 

[TaxGuyBill]

---

@sjrcpa wrote:

Use average monthly balances.

---

I haven't researched it for quite a while, but I have stuck in my head that you aren't required to use the 'average'.  That you can pick the one that has the highest interest rate, and use that $750,000.

But as I said, that is just one of those random things that are floating in my head, so I could be wrong.

[Grateful2002]

@TaxGuyBill 

I am not sure how to account for the fact that the 2022 903k mortgage was outstanding for 7 months only. The software does not take that into the calculation. It still calculates as average balance 899k  (borrowed 903K, principal paid 6406, ending balance 896K)

I was reading the Proseries instructions and it says: 

"Enter the beginning of year balance on up to five qualified loans and any additional amounts borrowed during the current tax year. The program will determine the average home acquisition loan balance and interest allocated to that loan based upon your entries."

But, It does not account for the fact that the loan was outstanding for only 7 months for 2022 even though I entered that info in part 1 on the deductible home mortgage interest worksheet. It still totals both loans balances to 1.2M and then applies the limitation percentage. So what am I missing?

[TaxGuyBill]

Sorry, I've never used the worksheet.  But from the comments that I've read, the worksheet isn't set up particularly well and you need to 'know' how to enter things or it ends up with the wrong numbers (which is what you are seeing now).

If you are comfortable manually calculating it, you may consider just skipping the worksheet and just enter the final result.

[Grateful2002]

Right.

So if I have to enter manually, my only question would this be correct to calculate the average and to account for the 7 months outstanding loan balance.

If we take the 903K debt and 7 months the loan was outstanding, it would be 903k/12 X 7 months= $451,500? So to enter $451,500 and 903k. Am I at least understanding this correctly in terms of how the average needs to be calculated? 

[TaxGuyBill]

I have no idea.   😂

It is late so my mind isn't working well, but without looking at the instructions, here is my thought:

1) 5/12th of the interest of the smaller loan for the first part of the year.

2) The total interest in the last 7 months was 100% of the big loan, and 7/12ths of the smaller loan.  Add those up and limit it by multiplying it by 62.5% (750,000/1,200,000 = 62.5%)

3) Add #1 and #2 and put it on Schedule A.

But as I said, it is late and well past my bedtime.   😂

[Grateful2002]

@TaxGuyBill Haha Same! And I only slept 4 hours last night!

Thank you! I was actually attempting to do what you are suggesting myself before reading your reply. It makes sense. The only thing I am having an issues with is, would the loan balances be $1,200,000 since the big loan was only outstanding for 7 months?! Aren't we supposed to take the average of that loan which would be less than 1.2M if we do so since it was only outstanding for 7 months, thus the percentage would be higher than 62%?! 

[MarinaEA]

@sjrcpa 

---

@sjrcpa wrote:

but for home purchased in 2022 the loan wasn't outstanding all year so that's too high.

Use average monthly balances.

---

Based on the IRS guide how to calculate the average balances, seems, it does add up to be about 1.2M for both loans. 

Per the pub.

1. Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally, January 1) _____
2. Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally, December 31) _____
3. Add amounts on lines 1 and 2 _____
4. Divide the amount on line 3 by 2.0. Enter the result

Mortgage 1 smaller loan: Jan-December, so you sum up the balances in January and December and divide by 2 to get the average. So, let's say Jan balance was 320K and December balance was 318k. Add 2 and divide by 2 would be $319K

Mortgage 2 larger loan: July-Dec, similarly sum up the balances in July and December, divide by 2 to get the average. Lets say July balance was 903K, and December 899K so the average is 901K

Then add both and the total average of both loans is indeed about 1.2M as OP mentioned in his post. The the percentage limit applies. 

And if we use the average monthly balances method as the IRS allows as well, then the result would be close to the same as above. Per IRS:

"For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. "

I have to say these IRS guidelines don't quite make sense for someone who obtained mortgage over 750k mid year. But that's how they tell you to calculate it? If so, seems, the Proseries worksheet does calculate it correctly with both loan balances to be about 1.2M?