Mortgage Interest Deduction Limits: Buying New Home but Keeping Old as Rental Property - Impact on $750k Cap?

This is a good question about the mortgage interest deduction limits! The key here is understanding how the IRS handles property that changes use during the year. For those first 17-18 days of 2025 when both properties qualify as personal residences, you are technically over the $750,000 combined limit. However, the IRS allows you to allocate the interest based on the use of the property throughout the year. You would calculate what percentage of the year House A was your personal residence (about 5% of the year) and only that portion of the interest would count toward your mortgage interest deduction on Schedule A. The remaining 95% of the interest on House A would be reported as a rental expense on Schedule E. For House B, 100% of the interest would be eligible for the mortgage interest deduction, but subject to the $750,000 limit. Think of it as a day-by-day calculation rather than an all-or-nothing situation. The IRS recognizes that properties change use during the year and allows for proportional treatment.

I went through something similar last year and found this tax situation super confusing. I ended up using https://taxr.ai to analyze my mortgage documents and property transition. Their system helped me figure out exactly how to allocate the mortgage interest between Schedule A and Schedule E based on the days of use. The tool was able to look at my closing documents, mortgage statements, and lease agreement to determine the exact dates and calculate the proper allocation. It also explained how the $750k limit applied in my situation and created documentation to support the deductions in case of an audit. They even provided specific reference sections from IRS publications that covered my exact situation!

I just wanted to follow up about my experience with taxr.ai after trying it based on the recommendation here. It was exactly what I needed for my mortgage transition situation! I uploaded my documents and within minutes got a detailed breakdown of how my mortgage interest should be allocated between Schedule A and Schedule E. The system explained that for my situation, I needed to calculate interest day-by-day and showed exactly how the $750k limit applied to my specific scenario. It also created documentation showing my basis for depreciation and when to start depreciating my rental property. What really helped was the personalized explanation citing the specific IRS rules that applied to my situation. Definitely cleared up my confusion about the mortgage interest deduction limits!

Dealing with the IRS on this kind of question can be a nightmare. I spent WEEKS trying to get through to someone at the IRS who could answer this exact question last year. After dozens of attempts and hours on hold, I found https://claimyr.com which got me connected to an actual IRS agent within about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that you can prorate the mortgage interest deduction based on the days the property was used as a primary residence vs. rental property. They also explained that when you convert a personal residence to a rental, you need to document the fair market value at the time of conversion, as this becomes important for depreciation calculations and eventual capital gains when you sell.

I have to eat my words and apologize for being so skeptical about Claimyr. After struggling for months with IRS questions about my rental property conversion, I decided to try it out of desperation. I was connected to an IRS agent in about 35 minutes, which was nothing compared to my previous attempts that never got through. The agent gave me clear guidance on how to handle the mortgage interest deduction when converting a property mid-year. They explained that I needed to track the exact dates of conversion and allocate mortgage interest accordingly, with the personal residence portion subject to the $750k limit on Schedule A and the rental portion going on Schedule E. Having official confirmation directly from the IRS has given me confidence in how I'm handling this on my tax return. Would have saved me months of stress if I'd tried this sooner!

Don't forget that when you convert your primary residence to a rental property, your basis for depreciation becomes the LOWER of either your adjusted basis or the fair market value at the time of conversion. This can have significant implications for your future tax situation when you eventually sell the property. Also, keep in mind that any capital improvements you made to the property while it was your primary residence will affect your basis calculations. Document everything thoroughly!

Has anyone here used tax software to handle this situation? I'm wondering if TurboTax or H&R Block can properly allocate the mortgage interest between Schedule A and Schedule E when a property changes use mid-year.

This is exactly the type of complex situation where proper documentation becomes crucial. I went through something similar when I converted my condo to a rental property mid-year. The key insight that helped me was understanding that the IRS views this as two separate "loans" once the conversion happens - even though it's technically the same mortgage. The personal residence portion (those 17-18 days) gets treated under the mortgage interest deduction rules with the $750k limit, while the rental portion goes to Schedule E as a business expense. One thing I'd recommend is taking photos of your move-in date to House B and any documentation showing when you started advertising House A for rent. The IRS likes clear evidence of the conversion date. Also, if you're working with a property management company, get a copy of the management agreement as it establishes the "placed in service" date for rental purposes. Keep detailed records of all expenses during the transition period too - things like cleaning, minor repairs, or staging costs can often be deducted as rental expenses once the property is available for rent, even if you don't have a tenant immediately.

One thing I'd add to all the great advice here is to consider setting up a separate bank account for your rental property expenses once House A is converted. This makes record-keeping much cleaner and helps establish that clear business purpose the IRS looks for. Also, since you mentioned you've been reading IRS publications but getting confused - Publication 527 (Residential Rental Property) has a specific section on converting personal use property to rental use that might help clarify things. It walks through examples similar to your situation with the day-by-day calculations everyone's been discussing. Another consideration: if you're planning to potentially move back into House A someday (like if it's in a great school district for future kids), be aware that there are rules about how long it can be a rental before you lose certain tax benefits when you convert it back to a personal residence. Just something to keep in mind for long-term planning!