Hello,
Yes, the IRS allows for mortgage interest to be deductible on the first $750,000 of your mortgage for your previous home and current home. Since the the amounts reported on your 1098s yield a total amount over $750,000, you can use the average mortgage balance per the IRS. When entering your 1098s, enter the "not most recent 1098" first, then enter the current 1098 with beginning balance as 0.
Your tax entries/numbers flow from the IRS form 1040 into the CA state return. You can then go to your CA return and make the adjustments to enter an adjustment for the amount over the federal limit, which is $750,000 ($375,00 for married filing separate).
