Hi,
Last year, I sold my existing home and bought a new home with about a month of overlap. This means I had 2 mortgages during the last year and hence two 1098s each referring to a different property. When I use either Turbo-Tax or follow IRS Pub 936 (https://www.irs.gov/publications/p936), I see that both mortgage balances are added together to determine the final balance which is checked against the 750K debt limit (without consideration that they don't overlap for the most part). This disqualifies a large portion of my mortgage interest.
This seems inherently unfair and I've seen multiple suggestions to this problem on the internet. Of all the solutions to the problem, the following seems like the most fair that follows the spirit of the IRS regulations, but I am not sure if this is supported by any IRS documentation:-
Essentially, I am running Table-1 in https://www.irs.gov/publications/p936, once every month and computing a monthly qualified interest. So, on months where I had an overlapping mortgage, I'll get a very small deduction. Finally, add all the monthly qualified interest across months to get the yearly qualified interest.
Here's a table demonstrating this method:
Here,
Has anyone in such a similar situation used this approach? It would have been nice if one of the examples in IRS Pub 936 would cover this scenario as it seems very common.
If such an approach isn't allowed, then it seems like the only way to ensure you don't get surprise tax hit when moving (i.e., selling+buying) homes is to do it near the end of the year by selling first, renting back and then closing on the new home in the next year.
Thanks and appreciate any help on this. I am also planning to talk to a CPA/Tax attorney. I'll post what I can find from them.
Last year, I sold my existing home and bought a new home with about a month of overlap. This means I had 2 mortgages during the last year and hence two 1098s each referring to a different property. When I use either Turbo-Tax or follow IRS Pub 936 (https://www.irs.gov/publications/p936), I see that both mortgage balances are added together to determine the final balance which is checked against the 750K debt limit (without consideration that they don't overlap for the most part). This disqualifies a large portion of my mortgage interest.
This seems inherently unfair and I've seen multiple suggestions to this problem on the internet. Of all the solutions to the problem, the following seems like the most fair that follows the spirit of the IRS regulations, but I am not sure if this is supported by any IRS documentation:-
Essentially, I am running Table-1 in https://www.irs.gov/publications/p936, once every month and computing a monthly qualified interest. So, on months where I had an overlapping mortgage, I'll get a very small deduction. Finally, add all the monthly qualified interest across months to get the yearly qualified interest.
Here's a table demonstrating this method:
Code:
| Month | Mortgage-A | Mortgage-B | Total Balance | Applicable Limit | Allowed Interest ||-------|-------------|---------------|---------------|------------------|------------------|| 1 | $400,000.00 | | $400,000.00 | $750,000.00 | 100.00% || 2 | $400,000.00 | | $400,000.00 | $750,000.00 | 100.00% || 3 | $400,000.00 | | $400,000.00 | $750,000.00 | 100.00% || 4 | $400,000.00 | | $400,000.00 | $750,000.00 | 100.00% || 5 | $400,000.00 | | $400,000.00 | $750,000.00 | 100.00% || 6 | $400,000.00 | | $400,000.00 | $750,000.00 | 100.00% || 7 | $400,000.00 | $1,800,000.00 | $2,200,000.00 | $750,000.00 | 34.09% || 8 | | $800,000.00 | $800,000.00 | $750,000.00 | 93.75% || 9 | | $800,000.00 | $800,000.00 | $750,000.00 | 93.75% || 10 | | $800,000.00 | $800,000.00 | $750,000.00 | 93.75% || 11 | | $800,000.00 | $800,000.00 | $750,000.00 | 93.75% || 12 | | $800,000.00 | $800,000.00 | $750,000.00 | 93.75% |- For months 1-6, my average monthly mortgage balance was $400K, so all interest paid during those months is qualified.
- For month 7, the average monthly balance was $2.2M, which reduces the qualified interest for that month to only 34% (750/2200) of the interest paid during month-7.
- For the remaining months, the average monthly was $800K, which means only 93% (750/900) of the interest paid during those months is allowed.
Has anyone in such a similar situation used this approach? It would have been nice if one of the examples in IRS Pub 936 would cover this scenario as it seems very common.
If such an approach isn't allowed, then it seems like the only way to ensure you don't get surprise tax hit when moving (i.e., selling+buying) homes is to do it near the end of the year by selling first, renting back and then closing on the new home in the next year.
Thanks and appreciate any help on this. I am also planning to talk to a CPA/Tax attorney. I'll post what I can find from them.
Statistics: Posted by masterofinvesting — Mon Mar 25, 2024 11:03 am — Replies 1 — Views 49