Author Topic: LARGE mortgage - calculating amount of deductible interest  (Read 401 times)

HawkeyeNFO

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LARGE mortgage - calculating amount of deductible interest
« on: February 05, 2018, 11:07:06 AM »
Could have an opportunity or a situation ahead and want to make sure I understand.......

If I take out a large mortgage, one that is over the IRS limit of $750k for deducting interest, then interest remains deductible on $750k, but not the remainder, which could then be considered investment interest.  So if I get a $900k mortgage, I then have the following equation to figure out what is deductible:  750/900=83.33%.   So at tax time, I would multiply the interest shown on my 1098 form by 83.33% when itemizing.  Am I right so far? 

Interest on the remaining $150k could be considered investment interest, right?

Then later on, as the principal is paid down a bit, I would recalculate using the average amount of the loan over 12 months, say it's now $850k, so the new equation would become 750/850=88.24%, and I multiply that with the interest shown on the 1098.  Correct?

MDM

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Re: LARGE mortgage - calculating amount of deductible interest
« Reply #1 on: February 05, 2018, 12:34:11 PM »
See (h)(3) in [USC10] 26 USC 163: Interest, as modified by SEC. 11043. Limitation on deduction for qualified residence interest. in the new law.

IANAL, but the use of the word "acquisition" in the law implies the amount originally financed, and not the current principal balance.

If you are lucky, @Cathy will weigh in with a more prescriptive reference (or at least an operative definition of "acquisition" in this context).
« Last Edit: February 05, 2018, 12:37:56 PM by MDM »

SeattleCPA

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Re: LARGE mortgage - calculating amount of deductible interest
« Reply #2 on: February 06, 2018, 02:40:14 PM »
I don't think you can trace any of the interest unless you elect to not treat the debt as qualified mortgage debt which means, I think, you lose your mortgage interest deduction.

The relevant primary source is Temp Reg Sec. 1.163-10T(o)(5)(i)

MDM

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Re: LARGE mortgage - calculating amount of deductible interest
« Reply #3 on: February 06, 2018, 03:20:29 PM »
IANAL, but the use of the word "acquisition" in the law implies the amount originally financed, and not the current principal balance.
Based on 2017 Publication 936 - p936.pdf, it appears "acquisition" means something different to the IRS.
See the flowchart on page 3:
Quote
Were your (or your spouse's if married filing a joint return) mortgage balances
$1,000,000 or less ($500,000 or less if married filing separately)
at all times during the year?

So yes, it is the mortgage balance, not the amount financed when the loan was acquired, that matters.  Happy deducting!