Question

Mortgage Interest + Home Purchase

Forum|Forum|3 years ago
February 4, 2023
1 reply
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In 2022 we sold and bought a home.

I'm simplifying the numbers below for clarity.

Old home:

Purchased in June of 2017

Sold: June of 2022

Loan Payoff was: $425k

Interest Paid was: $8k

New Home:

Purchased June of 2022

Average Loan Value: $850k

Interest Paid was: $20k

Turbo Tax calculates the deduction as ~$16k

Math is 19k interest * ($750k IRS Limit / $850k average load value) = ~$16k

Now, that only considers the new loan. The old loan that was paid off in 2022 has the higher $1m loan value limit applied for interest deductions since it was purchased in 2017. So, should we be considering the total deduction as ~$16k + $8k interest from the first loan = ~$24k?

DMarkM1

No. The pre 2017 loan limit is only used to establish your qualified loan limit. However, in your scenario all of your mortgage interest is deductible.

Using the chart (Table 1) in IRS Publication 936 the loan limit on your old loan is the smaller of $1M or the average loan balance (in your scenario we'll say 425,000).

Since you have debt incurrent after 2017 (new loan amount 850,000) that is added to the old loan limit to equal 1,275,000, which is then compared to the post 2017 limit 750,000 and the smaller number is your qualified loan limit.

Having said all that still all of your mortgage interest is deductible. You had one loan that was paid off and then another loan started. So your average loan balance (since no overlap) is the beginning balance on 1 Jan 2022 of the old loan plus the ending balance on the new loan 1 January 2023 divided by 2. Worst case scenario

first loan started at 425K
second loan ended at 850K
Total is 1,275K divided by 2 = $637K which is below your $750K loan limit.

Therefore your deduction is not limited; follow these steps to enter an adjustment to eliminate the limitation:

Follow these steps to eliminate the limitation on your mortgage interest deduction:

Deductions and Credits
Update Mortgage Interest topic
Delete both 1098s
Done
Update the Mortgage interest topic
Yes
Put in old loan first
Primary Home
None of the above
Enter form information from old loan
Continue
No points to deduct
Yes Most Recent
Answer the Refi questions as needed
Continue
Add a lender
Same steps as above for the new loan
Continue
Done
Purchase date of first home should be same as the date in box 3 of 1098
Purchase date of new home should be same as date in box 3 of 1098
Payoff amount for old home and date of payoff
Loan balance on 1 Jan 2023 for new loan; leave date blank. Amount should be less than box 2 on 1098
Now you should see the page explaining the limitation
You can click the help me with this link and see that if you take your loan balance at the beginning of the year box 2 old loan and add it to the balance of new loan at end of year (loan amount 1 Jan 2023) and then divide by 2 the average will be below 750,000. Meaning all of your interest is deductible.
In the "Your Adjustments" box enter the total interest paid for 2022 from box 1 of your 1098s
Continue