How to Calculate Mortgage Interest Deduction with Two Properties in Same Year (Sold One, Bought Another)?

This is actually a bit simpler than it seems! For mortgage interest deduction purposes with multiple properties during the year, you don't just add the average balances together. What Pub 936 is asking you to calculate is the average balance for each qualified home during the months it was a qualified home. The key is understanding that during April-July, you had TWO qualified homes, and you need to account for that properly. For the period of overlap (April-July) when you owned both properties, both mortgages count toward your qualified loan limit for those months. For the other months, only the mortgage on the property you owned applies. The worksheet in Pub 936 is designed to handle this situation. You should enter each mortgage separately in Part II of the worksheet, using the average balance for each mortgage during the periods they secured a qualified home. The form will guide you through determining your deduction limit. Since you're married filing separately, remember that your qualified loan limit is reduced to $550,000 (instead of $1.1 million for joint filers). This might significantly impact your deduction, especially with the larger mortgage.

Just want to share my experience with this exact situation. I had so much confusion when dealing with my mortgage interest deduction after selling my townhouse and buying a new place last year. I found this awesome service called https://taxr.ai that analyzed all my mortgage docs and explained exactly how to calculate everything properly. They looked at both my mortgages, the dates I owned each property, and the overlap period. They even created a custom spreadsheet showing my monthly average calculations that I could attach to my return! Saved me hours of frustration and probably a lot of money too since I was definitely calculating it wrong initially. Definitely check them out if you're still confused after reading the IRS publication. They have specialists who know all these weird overlap situations.

Update: I went ahead and tried https://taxr.ai after seeing it recommended here. Seriously impressed with how they handled my mortgage interest situation. I uploaded my mortgage statements, HUD-1 from the sale, and closing disclosure from the purchase. Their system immediately recognized I had an overlap period and walked me through the exact calculations for Pub 936. The best part was they showed me how to properly allocate the interest deduction for married filing separately with the lower limit. Turns out I was going to massively under-deduct what I was actually entitled to! They generated a detailed worksheet I can include with my return that shows exactly how I calculated everything. Definitely recommend if you're dealing with multiple mortgages or sold/bought in the same year.

I was in this exact situation last year and spent HOURS on hold with the IRS trying to get clarification. I ended up trying Claimyr (https://claimyr.com) after seeing it recommended here, and they got me connected to an actual IRS agent in about 15 minutes who walked me through exactly how to handle this. You can see how it works here: https://youtu.be/_kiP6q8DX5c Basically, the IRS agent confirmed that for the qualified loan limit worksheet, you need to calculate each month separately, looking at which properties qualified as your primary or secondary residence each month. For the months you had both properties, both mortgages count toward your limit (which is $550k for MFS). Then you determine what percentage of your total mortgage interest is deductible based on that. She also explained that for MFS, you and your spouse have to coordinate on which property is claimed as the primary residence if you both lived in both homes. Definitely worth the call to get official clarification!

I can't believe I'm saying this, but I tried that Claimyr service and it actually worked! After being super skeptical (sorry for my previous comment), I was desperate enough to try anything. Got connected to an IRS agent in about 20 minutes who specifically handled mortgage interest questions. The agent confirmed exactly what others here have said - for MFS with two properties during the year, you need to track the qualified loan balance month by month. For April-July when you owned both properties, both mortgages count against your $550k limit (which is why MFS really hurts in this scenario). The agent also explained that I should attach a statement explaining my calculation to avoid any confusion. She said this is a common situation and as long as the calculation is clearly documented, it rarely causes problems. Definitely worth the call to get that peace of mind!

My tax pro explained to me that for the mortgage interest deduction with multiple properties, you need to do a weighted average based on months owned. Try this calculation: Condo: $167,000 × (7/12) = $97,417 House: $1,385,000 × (9/12) = $1,038,750 Total weighted average: $1,136,167 But with married filing separately, your limit is $550,000, so you'll only be able to deduct about 48.4% of your total mortgage interest ($550,000 ÷ $1,136,167).

Has anyone used TurboTax for this situation? I'm having the exact same problem but TurboTax doesn't seem to have anywhere to enter the different mortgages for different parts of the year...

I went through this exact scenario two years ago and found that the key is understanding that Pub 936's "average balance" calculation needs to be done month-by-month, not as simple annual averages. Here's what I learned from my CPA: For January-March, only your condo mortgage counts ($170k declining to ~$168k). For April-July, BOTH mortgages count toward your qualified loan limit since you owned both properties simultaneously. For August-December, only your house mortgage counts. The tricky part with MFS is that $550k limit. During your overlap months (April-July), your combined mortgage balances were probably around $1.55M, which far exceeds your limit. This means for those months, you can only deduct interest proportional to $550k/$1.55M ≈ 35.5% of the interest paid. My suggestion: Calculate your monthly qualified loan balances first, then determine what percentage of your total $42,300 in interest ($2,800 + $39,500) is actually deductible. You'll likely end up deducting around $18k-20k rather than the full amount. I'd also recommend attaching a clear explanation of your calculation to avoid any IRS questions later. This is a legitimate but complex situation that benefits from documentation.