Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

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Nearly A Moose
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Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by Nearly A Moose » Wed Mar 13, 2019 10:40 am

In 2018, I bought and sold personal residences and for the first time had a loan over the new qualified loan limit. Turbotax isn't of much help and just tells me to work through Publication 936 on my own (thanks!). So I'm working through IRS Publication 936 to figure out what mortgage interest I can actually deduct. The instructions calculating the average value of each loan. I'm struggling to answer two questions:

1. If I didn't have the home loan for the whole year (which applies both to the house I sold and to the house I bought), when I go to calculate the average value, can I simply add the monthly balance for each month I had the loan, add $0 for each month I didn't have the loan, and divide the total by 12 months? E.g., if I took out the loan in October, the math might look like this: (Oct Balance + Nov Balance + Dec Balance + $0 for all other months) / 12 = average loan value. This seems to be what the instructions in Pub 936 imply, but it's odd they don't say it explicitly.

2. Assuming the above is an appropriate way to determine the average loan value, should I use (1) the balance at the beginning of each month, (2) the balance at the end of each month, or (3) the balance listed on my monthly billing statements? Or can I pick so long as I'm consistent? In particular, I sold a property in December after making my Dec. 1 mortgage payment, so it will make a difference in how much interest I can deduct depending on what I use for my December value. Similar issue for the loan on the home I bought.

Thanks for the guidance. This feels like it should be well explained somewhere, but perhaps the IRS and TurboTax just assume that anyone with a non-qualifying home loan isn't doing their own taxes?? By the way, I left a more detailed version of this question here (viewtopic.php?f=2&t=275460) but didn't get any bites, so I'm hoping the above distills things better. Thanks!
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

megabad
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by megabad » Wed Mar 13, 2019 2:46 pm

Not a tax professional, seek professional help...just my opinions.

This is not my interpretation (your 12 month "average"), but I could be wrong and I agree that the instructions are ambiguous (heck the intent is ambiguous). Your loan never had a zero balance. Therefore there I think there should not be zeros in the calculation. Just my opinion though. The average is for the time when the mortgage existed.

Topic Author
Nearly A Moose
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by Nearly A Moose » Wed Mar 13, 2019 3:42 pm

megabad wrote:
Wed Mar 13, 2019 2:46 pm
Not a tax professional, seek professional help...just my opinions.

This is not my interpretation (your 12 month "average"), but I could be wrong and I agree that the instructions are ambiguous (heck the intent is ambiguous). Your loan never had a zero balance. Therefore there I think there should not be zeros in the calculation. Just my opinion though. The average is for the time when the mortgage existed.
Thanks. I've been confused by some of the references such as "enter an average balance of $0 for each month the loan wasn't secured by your qualified residence" (I'm paraphrasing). Perhaps that's trying to capture the scenario of someone with 3 homes rotating through which is considered the "second residence," not trying to account for the period in which the loan is not in existence?

One reason I'm so confused is that if I only compute the average balance based on the months for which I actually had the loans, the worksheet in Pub 936 interprets it as my essentially having a huge loan, and very little of my mortgage interest is deductible. For comparison, if I only had the original loan on the original house, I'd deduct about $26,000 in interest. The new loan on the new house generated about $8,000 in interest in the year. But if I run the worksheet using only the average values for the period for which the loans existed, I'm only allowed to deduct something like $7,000. And that makes absolutely no sense to me.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

megabad
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by megabad » Wed Mar 13, 2019 4:22 pm

Nearly A Moose wrote:
Wed Mar 13, 2019 3:42 pm
Thanks. I've been confused by some of the references such as "enter an average balance of $0 for each month the loan wasn't secured by your qualified residence" (I'm paraphrasing). Perhaps that's trying to capture the scenario of someone with 3 homes rotating through which is considered the "second residence," not trying to account for the period in which the loan is not in existence?

One reason I'm so confused is that if I only compute the average balance based on the months for which I actually had the loans, the worksheet in Pub 936 interprets it as my essentially having a huge loan, and very little of my mortgage interest is deductible. For comparison, if I only had the original loan on the original house, I'd deduct about $26,000 in interest. The new loan on the new house generated about $8,000 in interest in the year. But if I run the worksheet using only the average values for the period for which the loans existed, I'm only allowed to deduct something like $7,000. And that makes absolutely no sense to me.
I was just giving you my off the cuff interpretation, so take it with a grain of salt. I agree that it doesn't make perfect sense. I was hoping others would provide you with other viewpoints. I doubt my position somewhat now and will offer the following link where grabiner and others have provided the opposite viewpoint.

viewtopic.php?t=160076

I can't find the link, but if there truly is an IRS letter stating that you can calculate the balance monthly, then you are correct in doing so. Once again, not tax advice, seek professional help but the link above supports your original position and disagrees with me.

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HueyLD
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by HueyLD » Wed Mar 13, 2019 5:21 pm

I went through the worksheet for table 1 in Pub 936 and it doesn’t make sense at all.

I suggest the following approach:

(1). The entire mortgage interest on the old loan should be deductible because it existed before 12/16/2017 and the balances were below $1MM the entire period.

(2). For the new loan, take 750,000 divided by the average loan balance for the period it existed and multiply that by total interest paid for the new loan.

So, the deductible interest is calculated as follows:

(1) $27,797.64 for 100% of the old loan interest paid
(2) $ 4,715.32 for the new loan (=750,000/1,365,454*8,584.74)

Total deductible interest = 32,512.96

.

oslocal
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by oslocal » Wed Mar 13, 2019 6:00 pm

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Last edited by oslocal on Wed Mar 13, 2019 6:51 pm, edited 1 time in total.

oslocal
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by oslocal » Wed Mar 13, 2019 6:17 pm

I just read your other thread. It appears that your "problem" is that your old loan had a much higher interest rate than your new loan - or you paid more interest than you accrued during the year on the old one and less on the new one.
I.e. you paid 12.5 months of interest (12 in dec-nov, and a half in dec before sale) on the old, and maybe only 2.5 on the new (half of sep, plus oct and nov).

It appears that the way the worksheet is written, this artifact or "loophole" (for deduction bunchers) has worked against you.


Edit:
I just re-read your other thread and posted a reply.
I think it would be reasonable to assume you could pick any of the 3 as long as you were consistent - or even average daily balance.

KyleAAA
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by KyleAAA » Wed Mar 13, 2019 7:41 pm

HueyLD wrote:
Wed Mar 13, 2019 5:21 pm
I went through the worksheet for table 1 in Pub 936 and it doesn’t make sense at all.

I suggest the following approach:

(1). The entire mortgage interest on the old loan should be deductible because it existed before 12/16/2017 and the balances were below $1MM the entire period.

(2). For the new loan, take 750,000 divided by the average loan balance for the period it existed and multiply that by total interest paid for the new loan.

So, the deductible interest is calculated as follows:

(1) $27,797.64 for 100% of the old loan interest paid
(2) $ 4,715.32 for the new loan (=750,000/1,365,454*8,584.74)

Total deductible interest = 32,512.96

.
This is exactly how I interpreted it.

Topic Author
Nearly A Moose
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by Nearly A Moose » Wed Mar 13, 2019 8:28 pm

KyleAAA wrote:
Wed Mar 13, 2019 7:41 pm
HueyLD wrote:
Wed Mar 13, 2019 5:21 pm
I went through the worksheet for table 1 in Pub 936 and it doesn’t make sense at all.

I suggest the following approach:

(1). The entire mortgage interest on the old loan should be deductible because it existed before 12/16/2017 and the balances were below $1MM the entire period.

(2). For the new loan, take 750,000 divided by the average loan balance for the period it existed and multiply that by total interest paid for the new loan.

So, the deductible interest is calculated as follows:

(1) $27,797.64 for 100% of the old loan interest paid
(2) $ 4,715.32 for the new loan (=750,000/1,365,454*8,584.74)

Total deductible interest = 32,512.96

.
This is exactly how I interpreted it.
If that's the case, you both just made my day. I had thought the limit applied to all mortgages cumulatively on both my first and second home, but I will go back through and take yet another look at the publication. Ugh.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Topic Author
Nearly A Moose
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by Nearly A Moose » Wed Mar 13, 2019 8:31 pm

oslocal wrote:
Wed Mar 13, 2019 6:17 pm
I just read your other thread. It appears that your "problem" is that your old loan had a much higher interest rate than your new loan - or you paid more interest than you accrued during the year on the old one and less on the new one.
I.e. you paid 12.5 months of interest (12 in dec-nov, and a half in dec before sale) on the old, and maybe only 2.5 on the new (half of sep, plus oct and nov).

It appears that the way the worksheet is written, this artifact or "loophole" (for deduction bunchers) has worked against you.


Edit:
I just re-read your other thread and posted a reply.
I think it would be reasonable to assume you could pick any of the 3 as long as you were consistent - or even average daily balance.
Thanks. The old loan actually had a lower interest rate (3.5%, I'll never see that again), but it was still a 750k loan being paid all year. The new one is a higher rate and larger loan, but only a couple months old. I pulled the interest paid numbers from my 1098s, and I think they're accurate and reflect only scheduled payments - I never prepaid interest.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

Topic Author
Nearly A Moose
Posts: 1015
Joined: Fri Apr 22, 2016 5:28 pm

Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by Nearly A Moose » Wed Mar 13, 2019 8:31 pm

megabad wrote:
Wed Mar 13, 2019 4:22 pm
Nearly A Moose wrote:
Wed Mar 13, 2019 3:42 pm
Thanks. I've been confused by some of the references such as "enter an average balance of $0 for each month the loan wasn't secured by your qualified residence" (I'm paraphrasing). Perhaps that's trying to capture the scenario of someone with 3 homes rotating through which is considered the "second residence," not trying to account for the period in which the loan is not in existence?

One reason I'm so confused is that if I only compute the average balance based on the months for which I actually had the loans, the worksheet in Pub 936 interprets it as my essentially having a huge loan, and very little of my mortgage interest is deductible. For comparison, if I only had the original loan on the original house, I'd deduct about $26,000 in interest. The new loan on the new house generated about $8,000 in interest in the year. But if I run the worksheet using only the average values for the period for which the loans existed, I'm only allowed to deduct something like $7,000. And that makes absolutely no sense to me.
I was just giving you my off the cuff interpretation, so take it with a grain of salt. I agree that it doesn't make perfect sense. I was hoping others would provide you with other viewpoints. I doubt my position somewhat now and will offer the following link where grabiner and others have provided the opposite viewpoint.

viewtopic.php?t=160076

I can't find the link, but if there truly is an IRS letter stating that you can calculate the balance monthly, then you are correct in doing so. Once again, not tax advice, seek professional help but the link above supports your original position and disagrees with me.
Appreciate the answer and the link. Will check that one out. I tend not to doubt Grabiner...
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

KyleAAA
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Joined: Wed Jul 01, 2009 5:35 pm
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by KyleAAA » Thu Mar 14, 2019 12:30 pm

Nearly A Moose wrote:
Wed Mar 13, 2019 8:28 pm
KyleAAA wrote:
Wed Mar 13, 2019 7:41 pm
HueyLD wrote:
Wed Mar 13, 2019 5:21 pm
I went through the worksheet for table 1 in Pub 936 and it doesn’t make sense at all.

I suggest the following approach:

(1). The entire mortgage interest on the old loan should be deductible because it existed before 12/16/2017 and the balances were below $1MM the entire period.

(2). For the new loan, take 750,000 divided by the average loan balance for the period it existed and multiply that by total interest paid for the new loan.

So, the deductible interest is calculated as follows:

(1) $27,797.64 for 100% of the old loan interest paid
(2) $ 4,715.32 for the new loan (=750,000/1,365,454*8,584.74)

Total deductible interest = 32,512.96

.
This is exactly how I interpreted it.
If that's the case, you both just made my day. I had thought the limit applied to all mortgages cumulatively on both my first and second home, but I will go back through and take yet another look at the publication. Ugh.
If you discover otherwise please post back here and let us know! I already submitted my taxes for the year, so hopefully my interpretation was correct.

Topic Author
Nearly A Moose
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Re: Mortgage Interest Deduction - Calculating Average Loan Value for Mortgage over $750k

Post by Nearly A Moose » Thu Mar 21, 2019 9:04 pm

I thought I'd follow up with a response on what I did in case others come across this post in the future. I'm especially grateful for the reference back to the earlier post (viewtopic.php?t=160076). I read the IRS Letter Ruling (Number: 201201017, here: https://www.irs.gov/pub/irs-wd/1201017.pdf) and IRS Temporary Reg 26 CFR § 1.163-10T (here: https://www.law.cornell.edu/cfr/text/26/1.163-10T). While these both predate the most recent tax law changes, it appears that the rationale remains valid, and the Letter Ruling even explains how the Temporary Regulation remained applicable through one change in how the mortgage interest deduction worked. My read of these sources and the related forum discussion is that the taxpayer must use a reasonable method to apportion interest, and that Pub 936 and the Temporary Reg provide options that a taxpayer *may* use, but isn't required to use. They also reinforce that a taxpayer may make these determinations on a loan-by-loan and residence-by-residence basis.

So, from that, I decided I could justify deducting all of the interest paid on the pre-2018 loan because that balance was always below the then-prevailing $1,000,000 limit. For the new loan secured by a new residence, I determined the average loan balance by adding the beginning and ending loan balances for the year and dividing by two (or in my case, the beginning loan balance at the time I took out the loan plus the end of year balance). I then divided the current $750,000 loan limit by that average to get a ratio. I then multiplied the interest paid on that loan by the ratio to determine who much of that loan's interest was deductible and adjusted the overall deduction accordingly. I documented my work in a spreadsheet and saved the Letter Ruling and Temporary Reg to my 2018 tax year file.

Disclaimer: I'm not a tax lawyer or tax professional, and none of this is tax advice. I might be wrong in my approach. But I think the approach I have taken is reasonable and consistent with the regulation and guidance.

I made a more detailed version of this post that also generated some discussion, and I'm posting the same response there for posterity. Many thanks for the help!
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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