Loan on Two Homes

Today TaxMama hears from Jon in California, who has this plan. “I am going to refinance my current residence for $338,000. I will use $140,000 of that to pay off the existing mortgage. The remainder will be a down payment on my next house. The next house will be my primary residence; the current house will then be a rental. My question is about the interest on the current house’s new mortgage. Is it all claimed on schedule E? Only the bit associated with the $140,000 payoff?”

Dear Jon,

That’s an interesting way to go about it.

OK, $140,000 will replace your current mortgage. So, yes, use the interest on 41.42% of the new loan as rental interest.

Since the rest will be applied to your new home, use 58.58% of the interest on that loan as your home mortgage.

Keep using this proportion until the loan is paid off – or until you make a large lump sum payment. Then, determine which loan you’re paying off – and update the percentages.

Incidentally, if you lived in your last home for at least 5 years, remember to take advantage of the new homebuyers credit, worth $6,500. http://www.irs.gov/newsroom/article/0,,id=204671,00.html

And remember, you can find answers to all kinds of questions about mortgage interest and other tax issues, free. Where? Where else? At TaxMama.com.

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