Converted home to rental and bought a new home over $750,000; How do I get the mortgage interest deduction to work properly?

Forum|Forum|3 years ago
January 29, 2023
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We converted our primary residence to a rental in July of 2022 and moved into a new home we bought with a mortgage over $750,000. I believe I've prorated everything correctly in TurboTax between personal deductions and rental expenses but the mortgage interest is giving me trouble.

The "Deductible Home Mortgage Interest Worksheet" is showing the loan for the house we converted from primary residence to rental and the new home and is adding the averages for the full year of the mortgages together and using that to calculate the percentage of the home mortgage interest that we should deduct. Really what we want is deduct all mortgage interest on loan 1 until we moved out of it (as it was under $750,000) and deduct a discounted amount of the mortgage interest we paid on the new house since we moved into it (the discount being $750,000/$880,000 * the mortgage interest paid). I know the number, and have adjusted it to the right number when TurboTax asked, but do I need to worry about the Worksheet showing the wrong numbers?

Last question (Sorry for the book): I believe I also need to discount the points on the mortgage on the new home since the mortgage is over the $750,000 mark and points are really just prepaid interest. Is that correct?

DoubleDevilAuthor

@Carl11_2 Any thoughts on this?

Carl11_2

Employee

Some things the program can handle. Other things it just flat out can't. I say stop jumping through hoops and just elect to manually figure and enter your mortgage interest amount on both the SCH E and the SCH A for the 2022 tax year. It's a heck of a lot quicker than trying to troubleshoot software you or I didn't write.

do I need to worry about the Worksheet showing the wrong numbers?

The IRS doesn't get the worksheets. All they get is the "bottom line" numbers, and that's it. The main thing to make sure of, is that the interest claimed on SCH A does not exceed the interest paid on $750K *on SCH A* for the tax year. (There is no limit on SCH E, since that's business and the limits don't apply)

DoubleDevilAuthor

Thanks Carl. I did end up doing a lot of the calculations manually and some of your comments in other threads were very helpful. I was just worried about the worksheet not agreeing with my numbers, so I'm glad I don't have to worry about somehow getting the numbers in that worksheet to agree.