The mortgage interest limit is calculated based on your average mortgage balance for the entire year. In your situation, it sounds as if your average balance will not exceed $750,000 and your deductible interest should not be limited. You will want to calculate the average monthly balance for each loan and report that as your outstanding mortgage principal. You can do this by taking the Outstanding Mortgage Principal reported in Box 2, multiplying it by the number of months you carried the loan, and dividing that number by 12. Do this for both loans and report the calculated number as the Outstanding Mortgage Principal:
- In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
- Answer the questions and enter the information from your Form 1098s. Use the calculated amount for Outstanding Mortgage Principal. For Box 3, Mortgage Origination Date, use the original purchase date even if the Form is for a refinance.
- Answer What kind of property is this loan secured by?
- Answer Yes or No to We didn't pay any points.
- Answer Yes to Let's see if this is the most recent form for this loan.
- Answer Is this the original loan used to buy your property?
- Answer Is this loan a HELOC or a refinance? if it is not the original loan
- Answer Did you take cash out? if this loan is a refinance or HELOC
- Once you have entered both and are back in the Home loan deduction summary screen, click Done.
- If your total outstanding mortgage balance is under $750,000, you should be done at this point. All mortgage interest reported in Box 1 will be a valid itemized deduction.
- If your outstanding mortgage exceeds $750,000, answer NO to Do either of these apply to this loan? Answer No even if it does apply, by using the mortgage origin date of the original purchase back in step 3, TurboTax will correctly apply the proper mortgage limit on your home acquisition debt.
- Enter the calculated outstanding loan balance again for the amount on January 1, 2022 in the first field. Leave the second field blank.
TurboTax calculates the average balance by taking the average of the outstanding mortgage principal on Form 1098 and your balance due on January 1, 2022. By reporting your calculated average balance for both, it will apply the mortgage limit based on that amount.
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