Primary to Rental + New primary home + refinance

Question

In 2020, we refinanced our primary home and then put it on rental and then bought a new home and moved into it. As a result, I have 3 1098s:

Our first primary home was bought in 2015 and the loan amount was under $1M. (Interest paid - $12,098)
We refinanced that loan in middle of 2020 with a loan balance of $765K. (Interest paid - $13,274)
Later part of the year, we bought a new home with a loan balance of $2M and moved into it. (Interest paid - $24,413)

When I enter all three 1098s, TT messes up the deduction. So, I opted to do it manually. Is my below calculation correct?

100% of the 2015 loan under $1M is deductible as it was our primary property until refinance. So $12,098 is deductible.
After refinance, Up-to $750K of interest is deducible. So $13,274 * (750,000 / 765,000) = $13,013 is deductible.
Up-to $750 of interest is deductible for the new home. So 24,413 * (750,000 / 2,000,000) = $9,152 is deductible

Total deductible interest from first home = $12,098 + $13,013 = $25,111

Since we rented out our first home after we moved into the new home, the deductible interest portion of the first home for the number of days we stayed there (237) is $25,111*(237/366) = $16,260.

Total deductible interest of both homes for 2020 is $16,260 + $9,152 = $25,412.

When I enter my 1098, I am just filing one form with total interest of $25,412 and out standing balance of $750,000. This way I get interest deduction for the entire amount up to the limit.

Is my calculation correct?

Carl11_2 · Answer

I get the initial impression that your assumptions are wrong. Mainly because of missing information.

For starters, the total amount of mortgage interest that is deductible on SCH A is the interest paid on the first $750K of all SCH A mortgages totaled.

But you say you converted your primary home to residential rental real estate at some time after you refinanced it. Now I could keep going here with "assumed" details. But it would probably just add to the confusion. So lets do this.

First, understand that mortgage interest paid on residential rental real estate is *not* subject to any limitations. If you have a $2M mortgage on rental property, then 100% of the mortgage interest paid on that mortgage is a deductible rental expense on SCH E - not SCH A. But it gets tricky in the year you convert a property from personal use/primary residedence, to rental property.

First, it's important that you work through the program the way it is designed and intended to be used. That way, you deal with the rental stuff first. So that's what you need to do so the program will handle the conversion of your primary residence, to residential rental real estate, and handle it correctly. So for now, lets just concentrate on that and not concern ourselves with anything else at this point in time.

The below information will clarify things for you in the process of converting your primary residence to a rental in the SCH E section, that the program may not clarify well enough. So deal with the conversion first. This is going to be tricky, because you're dealing with the "ORIGINAL" cost basis (what you paid for the property when you originally purhcased it) *and* the refinance of that same property. So I'm expecting more specific questions as you work this through the Rental & Royalty Income (SCH E) section of the program.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day for any type of personal pleasure use during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence, 2nd home, or any other personal use reasons after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.