Yes, your average loan balance is calculated by determining the average loan balance for the year on all outstanding loans. The limit is then applied to the total interest paid on all loans.
TurboTax determines the average loan balance for each outstanding loan by taking the first and last month's balance, a method approved by the IRS. This works fine for the home you owned all year, but for the home you purchased mid-year, you would be better served by using a different IRS method, the average of the monthly statements.
To determine that, I would take the outstanding mortgage principal reported in Box 2 of the original Form 1098 for the new home, multiply that number by the months you had the new home, and divide by 12. That will lower the average balance reported for this loan, which will increase the deductible interest on all your loans. Since you got two 1098s for this loan when one company acquired it from the other, to make things simpler, I would combine the two entries into one 1098 into TurboTax to more easily navigate the entries. When you report Form 1098 for your new home, enter it this way:
- Box 1 Mortgage interest - Add the amounts together from both 1098s
- Box 2 Outstanding Mortgage Principal - Use the average monthly statement calculation
- Box 3 Mortgage Origination Date - Use the date on the first 1098 when you purchased the home
- Boxes 5 & 6 - Use the combined totals from both 1098s
- Make sure Box 7 is checked
In most cases, you will be able to deduct the points from your new home purchase in their entirety. However, to do this, you will need to mark the new home as your main home. That's fine, since that it is what it will end up being. Make sure to change Form 1098 for your old home to indicate it is for a second home.
