You will want to report the average balance for both homes for the mortgage interest deduction to calculate correctly. Your mortgage deduction will be limited if the average balance exceeds $750,000 for the year. When you converted the old home to a rental, you should take the four months of property taxes, points, mortgage insurance premiums, and mortgage interest as an expense to offset your rental income. You only want to use the unused portions to calculate your personal deduction.
For the remaining eight months that you can use as a personal deduction, you will want to calculate the average monthly balance by taking the Outstanding Mortgage Principal, multiplying it by the number of months you used the home for personal use, and dividing by 12. Report the calculated amount as the Box 2 Outstanding mortgage principal.
You will want to do the same for your new home. If you only had the mortgage on the new home for 4 months, you would take the mortgage principal reported and divide it by 3, since you only had it a third of the year.
Once you enter both, TurboTax will ask follow-up questions. Answer No to Do either of these apply to this loan? Answer No even if it does apply to your older loan. Enter the amount you calculated above for the outstanding loan balance on January 1, 2022. Leave the date paid off field blank.
Going forward, Form 1098 for your old home will be reported in its entirety in the rental section of your return.
