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sold a million dollar home, bought a 2 million dollar home


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This is a first for me! Client sold a home that cost $1,250,000 but was bought before 12/16/17, so the limitation on the mortgage was $1,000,000.  Debt was only $881,000 so no limitation.  Client sold home on 8/30/23.

Client bought another home on April 28, 2023.  Cost was $2,810,000.  Mortgage on 12/31 was $2,248,000.  So how much debt is deductible?  Is none of the second home deductible until Sept 1?  And then only $750k worth?  But all of the 1st home's mortgage is deductible until it's sold.  Or is it based on when they moved...

They paid points when buying second home too.  Are they deductible? Are the points affected by the lack of 2nd home's deductibility?

There's a vacation home too, but I know the answer to that one; none is deductible.

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Pub 936 has easy to understand explanations and the worksheet you need to calculate the interest that is deductible. You'll need to use that since you have pre- and post- 12/16/17 debt over one million. You will need the average balances of EACH mortgage and the totals are used on the worksheet. The pub also has excellent examples for you to follow.  There are 3 methods for calculating the averages, and you can choose which one works to your clients advantage, depending on the actual circumstances. 

Points are separate and aren't included on the worksheet's calculation, BUT they will be limited based on the percentage of nondeductible interest you arrive at using the worksheet, and that reduced amount is what you will include on Sch A.

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No, you must calculate the average for each separately and then add the two averages together to arrive at the amount to enter on line 7 of the worksheet.

You probably aren't using the interest method, so for each mortgage you would either have the average of beginning + ending divided by 2,  OR if you have lender statements you would add each month's balance divided by the # of months that mortgage existed during the year.

At least yours shouldn't be terribly complicated. I've had some that were refinanced, or mixed use where some of the balance was segregated out as n/d home equity debt where principal was applied first until that portion was repaid.

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From your original post, here are the details:

1st home prchd before 12/16/17, debt $881,000, sold 8/30/23

2nd home purchd 4/28/23, 12/31/23 mortgage balance $2,248,000. Also paid points.

Vacation home - No details. Original post said none is deductible. 

6 hours ago, joanmcq said:

Do I add the vacation home's interest to the mix?  I assume it would qualify as second home after the first one sells.

About the vacation home - What was the reason you originally said you knew its mortgage interest is nondeductible? Was that statement merely because there are 3 properties during 2023 or some other reason?  When was it purchased, and did you take this mortgage into consideration in prior years for the mortgage interest limitation?

It looks like the vacation home would qualify as the second home from 1/1-4/27/23 and again from 9/1 - 12/31/23.  It's during the period of 4/28 up through the date first home was sold on 8/30 where you have overlap and the problem where taxpayer owned 3 properties and must choose only 2 properties that you can say are first and second homes. For whichever property is the "third" (not the principal or 2nd home), then that interest isn't going to be deductible. 


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I had initially said it wasn't deductible because it was the third home.  I figured it didn't count, but I guess I was wrong!  Because when I put that interest and mortgage into the mix, it increases the amount of deductible interest.

This is one complicated calculation!  The only one I've had before was just a little bit above the $750,000 and dropped below it the next year.  This is the first year I'm preparing for this client.

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