Discussion:Excess Mortgage Interest Calculations
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Discussion Forum Index --> Advanced Tax Questions --> Excess Mortgage Interest Calculations
Discussion Forum Index --> Tax Questions --> Excess Mortgage Interest Calculations
| 27 March 2008 | |
| A client was carrying more than one mortgage for part of 2007 since he bought a new primary home before his old one sold. Consequently, for some time during the year the total qualified residence interest (QRI) exceeded $1,000,000. I'm trying to
determine the part of his total mortgage interest that is deductible and which part is not considered QRI due to the $1MM limit. The results I'm seeing from the tax software and also from following the directions in IRS Pub. #936 seem extremely harsh. It appears that the average mortgage balance of each mortgage is added together to compute the average balance of all home acquisition debt. What seems especially unfair is that if mortgage debt is over $1,000,000 for only a month or two, the calculations give it a full year's weight. For example, mortgage debt for November and December averages $1,200,000 and for January through October average mortgage debt is $400,000. The result seems to be that total acquisition debt is figured as the sum of $1,600,000 and therefore 37.5% of the total mortgage interest is considered non QRI and not deductible (unless it can be traced to some other kind of deductible interest). (600,000/1,600,000 = 37.5%) Does anyone have some experience and insight in this situation? On a related question, Publication 936 says you can use the "Interest Paid by Interest Rate Method" to determine the average mortgage balance. This would give a much more equitable result on mortgages not outstanding all twelve months of the year. However, the directions in Pub. 936 somewhat vaguely suggest that this method is only available if the mortgage debt was outstanding for the entire year. Am I reading that correctly? | |
Death&Taxes (talk|edits) said: | 27 March 2008 |
| But the instructions say that you compute the average balance of each mortgage, not both mortgages. Or am I missing something. | |
| 27 March 2008 | |
| Thanks for the quick reply. Yes, you compute the average balance for each mortgage outstanding during the year. Then these average figures seem to be added together to arrive at the amount that goes on lines 2 and 9 of the schedule in Pub. #936 "Average balance of all home acquisition debt." Line 9 reads "Total average balances of all mortgages on all qualified homes." | |
Death&Taxes (talk|edits) said: | 27 March 2008 |
| I recall doing this before, maybe over ten years ago, and calling an IRS specialist in Washington, and I remember the result was not that unfair, but I would bet those notes went the way of much of the stuff in this office....into the shredder when I moved 4+ years ago. It seemed to me that he factored into computing the new debt average the fact that it was a partial year. | |
TrustButVerify (talk|edits) said: | 5 April 2008 |
| Any further information on this question? I have exactly the same situation. | |
| 5 April 2008 | |
| I have done a few of these over the last few years. I set up an excel spread with a column for each mortgage and equity and then followed the instructions, letting excel do the math. I had one last week where there were two homes. Even though each mortgage was for less than 12 months, you get the average using 12 months. Then I discovered that Lacerte will do the rest of it for you. Scroll all the way to the bottom of screen #25. I had to do a little tweaking until I figured out how to fill it out correctly. In the case I just mentioned, I was worried because taxpayer's mortgage balance was over the maximun for a few months, but when averaged out correctly, he was under. Yea! | |
Ken@seamann.com (talk|edits) said: | 6 April 2008 |
| You have to do a "weighted average" to come up w/ the correct amt. If there is only a 2 month overlap, that is the only interst portion that will be "over" the $1MM limit | |
Death&Taxes (talk|edits) said: | 6 April 2008 |
| That was what the man said, Ken....a weighted average so that the months when he did not exceed the limit are not factored into the calculation. | |
