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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2574
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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I have two loans on the same house (I am married) one is for

Customer Question

I have two loans on the same house (I am married) one is for $950,000 at 3.5% interest and the other one is for $250,000 at 4.5% interest. Can I deduct interest on loans up to $1,000,000 or up to $1,100,000 -- there is very confusing information on internet on that. Secondly can I pick and choose which loan interest I should apply first - since my loans are at different interest and it would make sense for me to maximize the deduction in using higher interest loan first and then top it off with lower interest loan before I reach the limit. Or I have to apply the interest on pro-rated basis between the loans?. Please reply only if you can provide some authorizative rulings on those issues.
Submitted: 2 months ago.
Category: Finance
Expert:  ABC Accounting Group replied 2 months ago.

Hi. Great Questions. It is $1 million on the first mortgage and $100k on a second mortgage. I will be sending you the ruling/code in a few minutes. Thank you.

Expert:  ABC Accounting Group replied 2 months ago.

Code - I.R.C. § 163(h)(3) -

"(C) Home equity indebtedness -

(ii) Limitation

The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual)."

"(3) Qualified residence interestFor purposes of this subsection—

(A) In generalThe term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—(i)

acquisition indebtedness with respect to any qualified residence of the taxpayer, or

(ii)

home equity indebtedness with respect to any qualified residence of the taxpayer.

For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.

(B) Acquisition indebtedness(i) In generalThe term “acquisition indebtedness” means any indebtedness which—(I)

is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and

(II)

is secured by such residence.

Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

(ii) $1,000,000 limitation

The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return)."

One of the links to the full code:

https://www.law.cornell.edu/uscode/text/26/163

Customer: replied 2 months ago.
can you answer on how to apply interests from 2 loans?
Customer: replied 2 months ago.
but I do not get to 1 mil on the first mortgage - does it mean it is only $1,050k then (950 +100)
Expert:  ABC Accounting Group replied 2 months ago.

Yes - you are correct - if the 950k is your first mortgage and the 250k is the second mortgage.

Customer: replied 2 months ago.
What about of order of applying the interest from 2 loans
Expert:  ABC Accounting Group replied 2 months ago.

Which one is considered a "second loan"?

Customer: replied 2 months ago.
I applied and received both loans at the same time for the same house. Also in the IRC reference can you point out on why my situation will be interpreted the way you mention 950k for the first loan and 100k for the second, and not 1.1 million for both loans combined. thanks
Expert:  ABC Accounting Group replied 2 months ago.

Hi. Since it was hard to decipher, without discussing on the phone, if the 250k was a second mortgage or not. If these are both considered your main loans (and not a second), you are correct - the 1.1 million.