In early 2017, we purchased our house with two loans that totaled over $750,000 but less than $1,000,000. All the interest from those loans was deductible, even after the TCJA changes that lowered the limit to $750,000, since the loan was from before December 2017. TurboTax correctly allowed that full deduction in 2017, 2018, and 2019. In November 2020 we refinanced the remaining balances, which remained over $750,000, rolling both loans into a single new loan, taking out cash to cover the refi closing costs. We paid ~$2000 in points on the refi. My understanding of how all this would be treated:All interest paid in 2020 on the original loans used to purchase the house in 2017 would be deductible.The points on the refi will be deductible over the 30 year life of the refinanced loan.The interest will be deductible on the refi up to the amount of the original loans that the refi paid off (even over $750,000 - for the first 27 years, then that would fall to just $750,000, but not a concern because the balance will be far less than that by then). This would be calculated using the IRS's instructions in publication 936. (TurboTax tries to calculate that for you, but I can't tell if the calculation is correct due to issues explained below.) So for 2020 it would be something like $2,000 deductible out of $2,100 in total interest paid on that 1098. In any case, for 2020 the amount of interest on the refi is small compared to what we paid on the original loan (only for one month and at a much lower interest rate). When I enter the 1098 forms from the original two loans everything is fine - the expected large deduction of all the interest appears. But when I add the 1098 from the refi, TurboTax decides that about half the interest we paid on the original loans is no longer deductible. My tax owed increases by thousands of dollars, and I can't figure out how to get TurboTax to fix it. Have I misunderstood that tax laws regarding the effect of the refinance on the deductibility of interest already paid in 2020, or is TurboTax messing this up? Or both?

Question

Refinanced mortgage 1098 messing up deduction from original loan

Forum|Forum|5 years ago
January 29, 2021
9 replies
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In early 2017, we purchased our house with two loans that totaled over $750,000 but less than $1,000,000. All the interest from those loans was deductible, even after the TCJA changes that lowered the limit to $750,000, since the loan was from before December 2017. TurboTax correctly allowed that full deduction in 2017, 2018, and 2019.

In November 2020 we refinanced the remaining balances, which remained over $750,000, rolling both loans into a single new loan, taking out cash to cover the refi closing costs. We paid ~$2000 in points on the refi.

My understanding of how all this would be treated:

All interest paid in 2020 on the original loans used to purchase the house in 2017 would be deductible.
The points on the refi will be deductible over the 30 year life of the refinanced loan.
The interest will be deductible on the refi up to the amount of the original loans that the refi paid off (even over $750,000 - for the first 27 years, then that would fall to just $750,000, but not a concern because the balance will be far less than that by then). This would be calculated using the IRS's instructions in publication 936. (TurboTax tries to calculate that for you, but I can't tell if the calculation is correct due to issues explained below.) So for 2020 it would be something like $2,000 deductible out of $2,100 in total interest paid on that 1098.

In any case, for 2020 the amount of interest on the refi is small compared to what we paid on the original loan (only for one month and at a much lower interest rate). When I enter the 1098 forms from the original two loans everything is fine - the expected large deduction of all the interest appears. But when I add the 1098 from the refi, TurboTax decides that about half the interest we paid on the original loans is no longer deductible. My tax owed increases by thousands of dollars, and I can't figure out how to get TurboTax to fix it.

Have I misunderstood that tax laws regarding the effect of the refinance on the deductibility of interest already paid in 2020, or is TurboTax messing this up? Or both?

M

marko6Author

After some more forum surfing, it appears another thread describes the problem in more detail and that TurboTax does not correctly calculate average or total balances when you have multiple 1098s after a refinance:

https://ttlc.intuit.com/community/investing/discussion/deductible-home-mortgage-interest-worksheet-2020-error-avg-balance/00/1789700

If this isn't fixed in the next few weeks I'll be using a different service to file, even if I have to re-enter all my information.

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palmer2203

I'm having this same issue. If I put all the interest on one lender my tax burden is $5000 less than if I separate the interest correctly between lenders for refinances.

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StarmakerK

I am having the same issue.

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backspin3

same issue here. five thousand more tax due when I entered my refinanced 1098. please FIX this ASAP or I am switching to other service.

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akng

@marko6 I found the same issue. I spoke with a specialist who recommended using the desktop version but the same issue persists but allowed for easy diagnosis of the software problem.

The software sums the "avg loan balances" of the original and the refinanced loan, resulting in Turbo tax calculating your "avg load balance" as 2x your actual mortgage -- or at least in my instance it is 2x. Example, a $1 million dollar mortgage refinanced for $1 million is treated as a $2 million mortgage, resulting in only deductions for half or less of your actual interest paid.

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BMahoney44

Akng, I have the exact same issue, did they indicated a fix or still "working on it"?

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akng

Still working on it. The response was that it may be an issue with IRS instructions for the worksheet and that the issue is being investigated and may be resolved before filing season.

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sjkullberg

Yes, I am having a similar problem with multiple 1098s, combination of 2 dwellings, a refinance, and a change in mortgage servicers. The system thinks that I am exceeding the 750,000 limit and is restricting the donations. Please fix this problem quickly! Also, when I look at the Mortgage interest worksheet, the months are all wrong and it will not allow me to fix them. Where do you input that information?

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disco_stu

I'm having the same problem. 2020 was a big year for refi's, so this issue must be affecting a *lot* of people. The impact is somewhat hidden on worksheets deep inside the return, so I bet a lot of folks aren't even aware of the mistake. Intuit's reply is pretty disappointing.

I'm using a work-around similar to what is mentioned above. To keep things as close to correct as possible, I'm doing the following:

- For one of my 1098's, I'm entering the total interest from all 1098's. I'm listing the outstanding balance (Jan 1) from my first mortgage and the ending principle balance (Dec 31) from my last mortgage. This is basically treating the mortgage as if it were never refinanced.

- For my other 1098, I'm including lender name, dates, etc, but listing $0 for all principle and interest fields.

As far as I can tell, this results in the correct final calculation for my case (original loan in 2015, principle greater than $1M).

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tpherclimber

I'm having the same issue here… tens of thousands of dollars. what's up turbotax?

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GSD77

Might look at my posts for work around from last year. Hoping TurboTax fixed this year, but just tried a dummy mortgage and refinanced mortgage both below limitation and. It didn’t work. Cannot believe TurboTax didn’t fix this continuing problem.

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MK1996

Anyone still having this issue for the 2021 Tax Year? Same issue. Refinanced a 2013 loan in 2020 and since then can't get the interest deduction up to 1,000,000 as the case should be. Have to incorrectly put the loan origination date as that of the original loan and not my 1098 from the 2020 refinance.