Mortgage interest tax deduction

Question

I am having some issues figuring out how the tax deduction for mortgage interest works. This is for California, USA

I have a home that I bought for $807,000, with 2 loans:

1. $645,600 at 4.5%
2. $80,700 at 6% (But only interest for the first 10 years)

I know that i claim interest paid, up to 500k of home value, as tax deduction.

How do I calculate that, when I have 2 loans, and my home value is over 500k?

Can I deduct the $483.84 I pay for the second loan, plus 64.9% (500,000-80,700)/645,600=0.64947 of the $2,421.00 interest I pay for the first loan, for a total tax deduction of 2,904.84 2,421.00+483.84?

Answer 1

If you purchased your home on or after Dec 15, 2017, the limit is $750K. If the home was purchased prior to that, the limit stays at the previous limit of $1M (even if you refinance). In your case, your total mortgage value is $726,300 which is less than the limit regardless of when you purchased your home, meaning you can deduct the entire amount you pay in interest for those two loans.

To answer your question in the general sense, had your total mortgage been more than the limit, you simply calculate the decimal value of the allowed limit divided by your total balance, and multiply that by each loan's total interest for the year. For example, if your total mortgage value was $1.6M for a home purchased in 2018, then your ratio would be 750K/1.6M = 0.469 (you should round to 3 decimal places). Then exactly 46.9% of the interest you paid on each mortgage would be deductible (regardless of their individual interest rates or balances).

Note the "total mortgage" amount is the average mortgage balance throughout the year.