<< I know you can only deduct mortgage interest on principle of $1,000,000. How do you calculate the interest that is deductible when the principle was over $1,000,000 at beginning of year and goes below it by the end of the year. >>You could allocate the deduction based on the amount of the principal balance and how long it was outstanding. That would be the hard way.I would do the following:Take the principal balance at the beginning of the year and add it to the principal balance at the end of the year. Divide this result by two to give you the average principal balance for the year. From this result, subtract $1,000,000. If the result is zero or less, then deduct all of your mortgage interest for the year. If the result is greater than zero, divide $1,000,000 into the average principal balance for the year. Take this % and multiply it by your total interest expense for the year and this would be your interest deduction.
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