TurboTax does not handle this situation; you must figure your mortgage interest deduction and enter it as an adjustment. First, I'll walk you through the steps to figure your mortgage interest deduction and then I'll give you the TurboTax entries to make.
Basically you have two mortgage debts. One that was paid off in 2022 and another for a new home that has two servicing lenders. The mortgage interest deduction limitation is figured by finding the average balance for the year of all your mortgage debt and then dividing your loan limit by that total. This gives you a ratio that you apply to your total mortgage interest paid for the year to arrive at the deductible portion.
Since you sold your first home and then purchased the second home you'll need to find average balance for each and add them together. Add the first and last balance for each debt and divide by 2. Then multiply by the number of months the loan was outstanding and divide by 12.
Use the amount in box 2 of your oldest 1098 and add the payoff amount and divide by 2. Then, if the loan was outstanding for 6 months multiply by 6/12.
For the second debt use the box 2 amount from the current 1098 and the ending balance (1 Jan 2023) of your current loan and divide by 2. If that loan was outstanding for 3 months then multiply by 3/12. Add those balances together to get your total average balance. That is the average balance of all your mortgage debt for the year.
You oldest loan was taken out prior to Dec 2017 so the loan limit on that loan is actually $1M or the average balance on that loan whichever is less, but not lower than $750K. In your case it appears the loan limit will be $750K
You second mortgage taken out in 2022 has a loan limit of $750K. Since your first debt is less than $750K your overall loan limit is $750K.
Now divide 750K/average loan balance. Multiply that ratio by the total of all the mortgage interest you paid from box 1 of your forms 1098. The result is your deductible mortgage interest.
It is best to delete all the 1098s you have entered and start from scratch. Start with the first loan (oldest) on the home that you sold. Enter all the form information and be sure to select "Yes, this is the most recent form 1098" for this debt.
Next enter the 1098 for the first lender of your new home. In this case answer "No, this is not the most recent 1098 for this debt."
Finally enter the most current 1098 and answer, "Yes, this is the most recent 1098 for this debt." Click "Done" and you will be asked additional questions about the payoffs.
Enter the payoff amount for the oldest loan and the payoff date. Enter the ending balance for the current loan (1 Jan 2023) and do not enter a date.
TurboTax will likely indicate your deduction is limited and give you the opportunity to enter your calculated amount.
Keep your calculations with your tax documents in case it ever comes up. I'll let you know that no forms 1098 are submitted with your tax filing documents. Your mortgage interest deduction is simply entered on your schedule A. The calculations and worksheets are kept by the taxpayer.
@punkerlewis
[edited: 3/30/2023 10:37am PDT]
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