@Vadim
Of all your options, if you look at the actual tax forms, none of them will generate a truly accurate worksheet which is supposed to be defensible to the IRS. This is because the worksheet performs the forced calculation incorrectly which carries in to the average mortgage balance, as you've pointed out, when you have loans that were closed out into a refinance. Unless TT has follow-up questions or a way to flag in the CA state questions that the loan was for a Refi (which it DOES NOT ask), there is no way for its logic to accurately populate the worksheet (and thus average mortgage balance).
The options TurboTax have left us all with is ingenious because it abdicates them from liability (in lieu of patching the issue, which they seem to not be doing at this point) -- if you make the changes you suggest (to get the system to accurately calculate your average balance), you are providing inaccurate information on your loans, and TurboTax will not provide support to you in the case of an audit because the information you provided is incorrectly entered into the worksheet.
