There are currently several major bugs in how TurboTax handles scenarios where more than one 1098 is received for the same property due to loan sale or refinance.
1) TurboTax is not prompting when entering the 1098 to indicate if the loan the form is for was paid off before the end of the year. I have switched over to the forms view and manually checked off box 9 (Check this box if you refinanced your load with a different lender, paid off this loan or sold the property) myself and it does not appear to actually fix the problem but it would seem like fixing this is needed for TurboTax to even have enough information to correctly handle the scenario.
2) Regardless of if box 9 is checked on the worksheets for the individual loans TurboTax appears to be adding up the amounts in box 2 of all the 1098s and if they go over the applicable limit (750k or 1 million both of which we would hit here) it is kicking in the restriction on mortgage interest.
3) In this scenario TurboTax does actually prompt you and asks if you meet either of the exclusion scenarios but then it totally ignores how you answer that question and puts yes onto the worksheet regardless, so I am not sure why it even bothers.
4) What makes this especially confusing is that TurboTax does not immediately take away the mortgage deduction instead it leaves it alone until the smart check when it pops up that you have not filled in the box on the Tax and interest worksheet which would indicate the amount of the interest restriction. Once this value is filled in it takes the deduction away and instantly reduces your refund by a giant amount.
In talking with support, I was told the "fix" is to falsely report the value in Box 2 of one of the 1098s as $1 when entering the form into TurboTax. I am going to pass on any fix that has me fudging the numbers I report to the IRS. And that fact that this is actually being suggested as a fix to what is obviously a software bug has me super concerned about my past tax returns.
