Question

Home interest tax deduction

Forum|Forum|4 years ago
March 26, 2022
1 reply
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I think Turbotax calculated my home interest deduction incorrectly. Situation is as follows:

At the beginning of the year we owned a home that we paid interest on. The mortgage amount was under the interest deduction limit. We received a 1098 for this loan.

Mid-year we sold that home, and two months later we bought a new home that we paid interest on. The new mortgage amount was over the interest deduction limit; the deductible interest on this mortgage is about 40% of the total interest. We received a 1098 for this loan.

I entered two separate 1098s for the two loans in Turbotax.

When Turbotax calculated our deductible home interest, it applied the 40% eligible deduction rate based on the second home mortgage to interest on both mortgages. This seems incorrect to me; I think we ought to be able to deduct 100% of the interest for the home we lived in at the beginning of the year and sold, since the mortgage was under the limit, and deduct 40% of the interest for the home we bought and live in now.

Correct? I don't see any way to fix this in Turbotax other than an override and that causes issues with efiling.

Thanks for help.

R

RaifH

The deduction for mortgage interest starts to be limited once the loan exceeds $750,000 on homes purchased after December 15, 2017 or $1 million on homes before that. It considers the average balance for the year and the total interest paid; it does not apply the limit to each separate loan.

However, since you did not carry either mortgage for the full year, the outstanding mortgage principal reported on Form 1098 does not accurately reflect the average balance for either loan. You can determine the average balance for each loan separately and report that on their respective 1098s.

For example, if you sold the old home in June that had an amount of $500,000 reported as the Outstanding Mortgage Principal in Box 2, your actual average balance is $250,000 because you carried the loan 6 out of 12 months. You can report $250,000 as the Outstanding Mortgage Principal. Likewise for your new home. If you purchased it in August and the Box 2 amount is $1,800,000, your actual average mortgage is 5/12 of $1,800,000.

Once you enter both loans in this manner, TurboTax will ask for the end-of-the-year balances on each loan. Enter the same amount that you calculated above as the balance at the end. You can enter the sale date for the first home and leave that field blank for the new home. This is because TurboTax determines the average balance by taking the balance at the beginning of the year from the Outstanding Mortgage Principal on Form 1098 and at the end by the amount you report here. It works unless you do not carry the loan for the entire year, in which case using the average monthly balance method above is more beneficial.