Mortgage interest tax

3 Replies

Hello, We live in silicon valley where home prices have soared like crazy !!

We recently closed our new home with an outstanding loan amount of $1.4M

Our current home has an outstanding loan of $450K. We plan to rent it out starting next month.

Understand I can write off mortgage interest only up to $1M.

I also plan to payoff the current mortgage in about a month (the outstanding $450K)

Am I better off paying the $450K towards the new loan, reducing it below $1M ? (if there is a difference between how the $1M maximum is treated between primary residence and rental property)

The current home has been our primary home for 8 months and the new home will be the primary home for 4 months, with some overlap. How will this be taken into account with the tax filing forms

Even if we pay down the $450K towards the new home loan, I understand my monthly payment will not go down (We took a 5/1 ARM loan for the new home) , but how will the outstanding loan amount max be calculated ?

In short, I would have had --

$450K mortgage for 7 months of the year (current home before we closed the new home)

$1.4M mortage for the new home for 5 months as our primary residence + $450K for 1 month

And what happens if we can somehow get $850K more in a month to bring the total down to less than a million for both homes combined ? we would have still have had a month or two when the outstanding mortgage was over $1M. how are the dates calculated ? Is it $1M on Dec 31st ?

Thanks,

You can deduct the mortgage interest on up to 2 personal residences in a year, but the total of the mortgages has to be under $1M, so you will have some interest that is not deductible on your personal property.

You can deduct the interest on your rental property on schedule E from the date it is placed in service. The mortgage on the rental property does not count against your $1 million dollar mortgage limit. The $1M limit pertains to property held for personal use, not business property.

Does it make good business sense to pay down the loan on your primary residence to below $1M just because some of it will be non-deductible on your taxes?  I can't answer that for you, but I think it is the question you should be asking.

FYI - you can deduct mortgage interest on a primary residence on up to 1.1 million. Even though you may not have a home equity loan, the IRS has ruled in saying that you can use the 100k home equity loan/HELOC limit to add to your total deductible limit.

The IRS has a fairly user friendly worksheet regarding mortgage interest deductions calculations in Publication 936.

https://www.irs.gov/pub/irs-pdf/p936.pdf