Mortgage Interest Deduction on Two Homes-Applying the $750K loan balance limit

[Ephesians3-14]

I have a client who sold his personal residence in Illinois in 2022. The mortgage on that home was $300,000 at the time he sold it. 

After selling the IL home, he bought a home in Idaho and took out a $950,000 mortgage. He is splitting this loan with his son and each will deduct their half of the mortgage interest. Both are on the deed and both on the loan, and each makes their 50% payment each month.

How do I apply the $750K mortgage limit in this situation?

Any help would be appreciated!

[BobKamman]

Do both live in the Idaho home?

[Ephesians3-14]

Yes

[BobKamman]

And that might not matter. This should be an easy question and off the top of my head, I would say that they both get to deduct half the interest paid.  It's not as complicated as the situation in this week's Lessons From The Tax Court, but here's that discussion:

https://taxprof.typepad.com/taxprof_blog/2023/02/lesson-from-the-tax-court-mortgage-interest-deducti... 

[BobKamman]

Question

My housemate and I, both the legal owners of our house, pay mortgage expenses from our joint account. The monthly expense also covers the real estate taxes on our home. The Form 1098 and property tax statement only have my name and social security number. How do we split these payments of interest and taxes on Schedule A so we can both claim our share on our separate tax returns?

Answer

To deduct taxes or interest on Schedule A (Form 1040), Itemized Deductions, you generally must be legally obligated to pay the expense and must have paid the expense during the year. Even though two unmarried individuals can both be the legal owners of the home and pay the mortgage equally or from common funds, the lender normally sends out only one Form 1098, Mortgage Interest Statement. Additionally, the local taxing authority may also only provide a receipt in one taxpayer's name.

If you’re each eligible to deduct the expense, you can both take a deduction for your portion of the expenses. Determine the proportionate share of the deductions based upon all facts and circumstances.

With respect to mortgage interest, apply the home acquisition debt limit and the home equity debt limit to the qualified residence or residences to determine if all of the mortgage interest can be deducted. If you're unmarried and pay mortgage interest on the qualified residence, the limit on home acquisition debt and home equity debt is applied per taxpayer. See Publication 936, Home Mortgage Interest Deduction for the debt limit amounts.

If each taxpayer paid one-half of the mortgage and real estate tax expenses, then each Schedule A should reflect one-half as deductions. Both of you should attach a statement to your Schedules A explaining how you're dividing the mortgage interest and payments of real estate taxes. Your housemate, who didn't receive the Form 1098, must list the mortgage interest he or she paid on Schedule A line 8b, "Home mortgage interest not reported to you on Form 1098."

Please keep your records on your split of the deductions for the mandatory review period (statute of limitations) since the information reported won't match the records submitted to the IRS.

https://www.irs.gov/faqs/itemized-deductions-standard-deduction/other-deduction-questions/other-dedu...

[Ephesians3-14]

Right - thanks for the example. But the angle of my question is whether I need to take into account the $750K loan limitation. The Mortgage in Idaho (of which my client is splitting 50%) is over $950K. But his share of the loan balance is half of the $950K (that would make it less than the $750K limit). Wondering if I need to reduce his 50% share of the mortgage interest because the total loan is over $750K....but his portion (50%) is under that threshold.

[taxes96786]

This is SOP for Finance companies, You need to ask them to send separate 1099s.

I enter the full amount on the 1099 and make an adjustment, with explanation (see SSN # return).

I do the same on both returns and have never had it questioned.  If IRS does question it they would have the docs to prove the split.  It's the same as splitting income and expenses on a joint owned rental or business.