Mortgage Interest Deduction Limits When Converting Primary Home to Rental and Buying New Property
I've been reading the IRS publication about the mortgage interest deduction limits multiple times and I still can't figure out my situation. Maybe someone here can help clarify. Here's what I'm dealing with: I currently live in my house (Property A) which has about $320k remaining on the mortgage. I'm closing on a new home (Property B) with a $750k mortgage on January 22, 2025. Instead of selling Property A, I plan to convert it to a rental property when I move to my new place. What I'm confused about is whether this creates a problem with the combined mortgage interest deduction limit of $750,000. I know that once Property A becomes a rental, its loan should be reported on Schedule E, but what about those first 22 days of January when it was still my primary residence? Do those days make the combined loan amount ($320k + $750k) exceed the $750k limit? How does the IRS handle this partial year situation? Anyone dealt with this kind of scenario before? What's the reasoning behind how this gets treated for tax purposes?
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Haley Stokes
This is a good question about the mortgage interest deduction limits when transitioning properties. When you convert your primary residence to a rental property mid-year, the IRS looks at how the property was used on a day-by-day basis. For those first 22 days of January when Property A was still your primary residence, the mortgage interest for that period would fall under the $750,000 combined limit for qualified residence interest. However, after you move and convert it to a rental, the interest on Property A becomes a rental expense reported on Schedule E. The good news is that the IRS doesn't just add up your loan balances to see if they exceed $750,000. Instead, they look at the actual interest paid during the period each property qualified as a personal residence. You'll need to prorate the mortgage interest for Property A for those 22 days (about 6% of the year), and that amount combined with the interest on Property B should stay under the limit. For the remaining portion of the year when Property A is a rental, that interest becomes a business expense against your rental income rather than a personal deduction.
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Asher Levin
•That makes sense, but I'm still a bit confused. So for my taxes, would I need to calculate the exact amount of interest paid during those 22 days for Property A? And does the bank provide this breakdown or do I need to figure it out myself?
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Haley Stokes
•You would need to calculate the exact amount of interest paid during those 22 days for Property A. Your mortgage lender will send you a Form 1098 showing the total interest paid for the year, but they won't break it down by your specific usage periods. You'll need to do the calculation yourself by taking the total interest paid for the year on Property A, dividing by 365, and multiplying by 22 to get the approximate interest for those 22 days. That's the amount that would count toward your $750,000 limit along with Property B's interest. The remaining interest from Property A would be reported on Schedule E as a rental expense.
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Serene Snow
I actually went through something similar last year and found this awesome tool at https://taxr.ai that really helped me figure out the mortgage interest deduction when transitioning properties. My situation was complicated because I had two properties for part of the year, and trying to figure out which interest went where was giving me a headache. What I liked about taxr.ai was that it analyzed my mortgage statements and closing documents, then gave me really clear guidance about how to properly allocate the interest between Schedule A and Schedule E. It even created a detailed worksheet showing exactly how much interest to claim for each property based on the dates I owned and used them. The tool showed me that I was about to claim too much interest on my primary residence, which could have raised audit flags. Definitely worth checking out if you're dealing with this kind of transition.
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Issac Nightingale
•Did you have to upload all your mortgage documents? I'm always nervous about uploading financial info to websites I don't know well.
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Romeo Barrett
•I've heard of these AI tax tools but sometimes wonder if they're any better than just talking to an actual CPA. Were the calculations they provided actually accepted by the IRS? No audit issues or anything?
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Serene Snow
•You do upload your documents, but they use bank-level encryption and don't store your files after analysis. I was hesitant at first too, but their security explanation put me at ease, and the detailed analysis was worth it for peace of mind. The calculations were spot-on and aligned with what my tax software ultimately generated. I filed early last year and received my refund without any issues or audit notices. The documentation they provided would have been helpful if questions came up though, as it clearly showed the methodology behind splitting the interest between Schedule A and Schedule E.
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Romeo Barrett
Just wanted to follow up about my experience with taxr.ai after seeing it recommended here. I decided to give it a try with my property transition situation, and I'm genuinely impressed with how it handled everything. The tool analyzed all my mortgage documents and gave me a super detailed breakdown of exactly how to allocate the interest between my primary residence deduction and rental property expenses. It even flagged that my lender had calculated interest slightly incorrectly after my refinance! What I really appreciated was that it created a comprehensive worksheet I could keep with my tax records that showed exactly how I calculated everything. Feels good knowing I have solid documentation if the IRS ever has questions. Definitely saved me from making some costly mistakes!
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Marina Hendrix
If you're struggling to get clear answers about your mortgage interest deduction situation, you might want to go straight to the source. I was in a similar situation last year and spent HOURS trying to get through to the IRS to confirm I was doing things correctly. After multiple failed attempts of waiting on hold forever, I found this service called Claimyr at https://claimyr.com that actually got me connected to an IRS agent in under 15 minutes. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call you back when they've got an agent on the line. The IRS agent I spoke with walked me through exactly how to calculate the prorated interest for my properties and confirmed I was handling the transition correctly. Having that direct confirmation saved me tons of stress during tax time.
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Justin Trejo
•Wait, so do they actually call the IRS for you? How does that even work? Seems too good to be true considering how impossible it is to get through.
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Romeo Barrett
•I'm super skeptical about this. The IRS hold times are legendary. How could some random service possibly get through faster than if I called myself? Sounds like they're just charging for what I could do on my own.
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Marina Hendrix
•They don't just call for you - they use a system that continually redials and navigates the IRS phone tree until they get through to a representative. Once an actual human IRS agent is on the line, they call you and connect you directly. You don't skip the line; they just handle the waiting and navigation part. I was skeptical too, but after spending literal days trying to get through on my own, I was desperate. The difference is they have technology doing the waiting instead of you having to personally sit on hold for hours. And when you're dealing with something as specific as mortgage interest allocation rules, getting definitive answers directly from the IRS gives you documentation that you've done due diligence.
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Romeo Barrett
I have to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I had some complex questions about my rental property transition that I wanted straight from the IRS. Never in a million years did I think I'd get through to an actual IRS tax specialist in under 20 minutes, but that's exactly what happened. I was able to ask detailed questions about how to handle the mortgage interest for the exact days before and after I converted my property, and got clear documentation of the IRS guidance. The agent confirmed what others here said - I needed to prorate the interest based on days used as a primary residence vs rental, and they walked me through the exact calculation method. Can't believe I wasted so many hours on hold in previous years when this service existed!
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Alana Willis
One thing nobody's mentioned here that tripped me up last year - make sure you're also tracking and deducting all the OTHER expenses that come with converting your home to a rental property! Don't just focus on the mortgage interest. Once Property A becomes a rental, you can deduct property taxes, insurance, repairs, property management fees, and even depreciation on Schedule E. The depreciation deduction is actually really significant - you depreciate the structure (not the land) over 27.5 years. And don't forget to document the fair market value of the property at the time of conversion, as that becomes your basis for depreciation. I recommend getting a formal appraisal when you convert - it's worth the cost for the tax benefits.
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Tyler Murphy
•Do you have to take depreciation? I heard somewhere that it's actually better not to because you have to pay it back when you sell?
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Alana Willis
•You don't have a choice about whether to "take" depreciation - the IRS considers it "allowed or allowable," meaning even if you don't claim it on your tax returns, they'll still treat it as if you did when you sell the property. It's true that you'll face depreciation recapture taxes when you sell, but that's generally at a 25% rate, which is likely lower than the tax benefit you received from the depreciation deductions over the years. Plus, those deductions give you tax savings now rather than later, which has time value. Bottom line: Always claim the depreciation you're entitled to, because you'll be treated as having taken it anyway, and you might as well get the benefit.
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Sara Unger
Does anyone know if refinancing affects this scenario? I'm in almost the exact same situation as the original poster, but I just refinanced Property A in November 2024 before deciding to convert it to a rental in January 2025. I've heard mixed things about how refinancing might affect the acquisition debt classification for mortgage interest deduction purposes. Some people say a refinance of acquisition debt is still acquisition debt, while others say it might be considered home equity debt with different limitations.
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Haley Stokes
•Refinancing doesn't change the classification of the debt as long as you didn't take cash out beyond the original loan balance (plus any improvements). If your refinance was just to get a better rate or term on the same loan amount, it's still considered acquisition debt for tax purposes.
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Sunny Wang
This is a really complex situation that I think requires careful documentation. I went through something similar when I converted my primary residence to a rental mid-year, and the key is keeping detailed records of exactly when the conversion happened. For your 22-day period in January when Property A was still your primary residence, you'll need to calculate the exact mortgage interest for those days and include it with Property B's interest to see if you exceed the $750k limit. The IRS looks at the actual interest paid during qualified residence periods, not just the loan balances. One thing that helped me was creating a detailed timeline showing: (1) dates Property A was my primary residence, (2) move-out date, (3) date Property A became available for rent, and (4) Property B purchase/move-in date. This documentation was crucial for properly allocating the mortgage interest between Schedule A (personal residence) and Schedule E (rental property). Also make sure you're calculating based on the actual interest paid during each period, not just prorating the annual amount. If you made extra principal payments or had different payment timing, it can affect the daily interest calculation. Keep all your mortgage statements and closing documents - you'll need them to support your calculations if the IRS ever asks questions.
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Mateo Sanchez
•This is excellent advice about documentation! I'm actually in a similar situation and hadn't thought about the importance of tracking the exact conversion date vs. when the property became available for rent. Quick question - did you use the move-out date or the date it became available for rent as your conversion point? I moved out of my property on January 15th but didn't get my first tenant until March 1st. I'm wondering if there's a gap period where the mortgage interest doesn't qualify for either the personal residence deduction or the rental property expense treatment. Also, when you mention calculating based on actual interest paid rather than just prorating, are you referring to how mortgage payments are front-loaded with interest? So the daily interest amount would actually be higher at the beginning of the year?
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Brian Downey
•Great question about the timing! For tax purposes, I used the date the property became available for rent (not just when I moved out) as the conversion point. The IRS generally looks at when the property's use actually changed, not just when you stopped living there. So in your case, the period from January 15th (move-out) to March 1st (available for rent) would be a bit of a gray area. During that gap, the property wasn't being used as either a personal residence or a rental, so the mortgage interest might not qualify for either deduction. Some tax professionals argue you could still treat it as personal residence interest until it's actually converted to business use. And yes, exactly right about the front-loaded interest! Mortgage payments early in the loan term have much more interest than principal, so the daily interest amount would be higher at the beginning of the year compared to later months. That's why I mentioned using actual interest paid rather than just dividing the annual total by 365 - the timing of when that interest accrued matters for accurate allocation. I'd definitely recommend getting guidance from a tax professional on how to handle that gap period, as it can affect both your personal residence deduction limits and your rental property expense calculations.
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Raj Gupta
This thread has been incredibly helpful! I'm dealing with a very similar situation and appreciate everyone sharing their experiences and resources. One additional consideration I discovered while researching this topic: if you're planning to claim any home office deductions for your rental property business (like if you manage the property from a home office), you need to be careful about how that interacts with the mortgage interest allocation. The home office deduction for rental property management would be claimed on Schedule E alongside your other rental expenses, but it's calculated separately from the rental property itself. Just wanted to mention this since managing rental properties often involves significant administrative work that might qualify for the home office deduction. Also, for anyone still working through the calculations, I found IRS Publication 527 (Residential Rental Property) really helpful for understanding the day-by-day allocation rules. It has some examples that are similar to what many of us are dealing with here. Thanks again to everyone who shared their experiences with the various tools and services - it's given me some good options to explore for getting definitive answers on my specific situation!
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