To report the mortgages on your old home, you may combine the two 1098s into one. Report the Outstanding Mortgage Principal in box 2 and Mortgage Origination Date in box 3 from the old loan. Add the numbers in box 1 to determine your total interest paid as well as any property taxes, points, or mortgage insurance premiums that are reported. Report this 1098 as not the original loan for your second home. Answer Yes it was refinanced and No, you did not take cash out assuming that in 2020 you solely refinanced and did not take cash out of the home.
For the new mortgage, you're going to have to outsmart the system. Report this one as the original loan for your primary home. Report all amounts as they appear except for Box 2, Outstanding Mortgage Principal. The IRS allows you to take the average of all your monthly statements to determine your mortgage principal. Your principal in January through November is 0 and for December it is what is reported in Box 2. You can divide the amount in Box 2 by 12 to determine your average for the year. Report this as your Outstanding Mortgage Principal.
Once you report the new loan with a reduced outstanding mortgage principal, TurboTax will calculate the deductible mortgage interest and properly apply the limits based on the age of the loan and the outstanding amount due. If you are above the limit, TurboTax will ask for the end of the year balances to determine the average balance for the year. It will also ask if the original loan was entered into prior to December 15, 2017. Answer Yes for your first home. For the second home, enter the same outstanding mortgage principal you calculated as the end of the year balance.
Since your old home was used as a rental for less than 15 days, you do not have to report the rental income, nor do you have to allocate the mortgage and taxes. In future years if you maintain this property as a rental, Form 1098 will not be reported here but instead in the rental section of your return. The outstanding principal on this home will no longer count against your deductible mortgage limit for a personal deduction.
