In early 2017, we purchased our house with two loans that totaled over $750,000 but less than $1,000,000. All the interest from those loans was deductible, even after the TCJA changes that lowered the limit to $750,000, since the loan was from before December 2017. TurboTax correctly allowed that full deduction in 2017, 2018, and 2019.
In November 2020 we refinanced the remaining balances, which remained over $750,000, rolling both loans into a single new loan, taking out cash to cover the refi closing costs. We paid ~$2000 in points on the refi.
My understanding of how all this would be treated:
- All interest paid in 2020 on the original loans used to purchase the house in 2017 would be deductible.
- The points on the refi will be deductible over the 30 year life of the refinanced loan.
- The interest will be deductible on the refi up to the amount of the original loans that the refi paid off (even over $750,000 - for the first 27 years, then that would fall to just $750,000, but not a concern because the balance will be far less than that by then). This would be calculated using the IRS's instructions in publication 936. (TurboTax tries to calculate that for you, but I can't tell if the calculation is correct due to issues explained below.) So for 2020 it would be something like $2,000 deductible out of $2,100 in total interest paid on that 1098.
In any case, for 2020 the amount of interest on the refi is small compared to what we paid on the original loan (only for one month and at a much lower interest rate). When I enter the 1098 forms from the original two loans everything is fine - the expected large deduction of all the interest appears. But when I add the 1098 from the refi, TurboTax decides that about half the interest we paid on the original loans is no longer deductible. My tax owed increases by thousands of dollars, and I can't figure out how to get TurboTax to fix it.
Have I misunderstood that tax laws regarding the effect of the refinance on the deductibility of interest already paid in 2020, or is TurboTax messing this up? Or both?
