The taxpayer may elect to treat a qualifying residence as a second residence for the purposes of deducting mortgage interest.  Sounds like in this case they should elect NOT to do so.

The math is weird, it follows ancient "temporary" regulations that were never made permanent so you can get into this situation in the first year of a second home.  Just ignore the second home the first year and the math will return to "normal" next year (i.e. you'll bump into the $750K limit).  There can also be ongoing problems if the interest rate on the second residence is lower than the first because, averaging.