Deductions & credits

You are correct the interest on the part of the loan not used to buy, build, repair the home it is secured by is not deductible.  To get that ratio right answer the following (numbers used are for example only).

After entering the form 1098 information: Box 1 - 10,000  Box 2 - 221,000 

1. Primary home
2. Already deducted the points
3. Yes, most recent 1098
4. Loan is a refinance
5. Yes, proceeds used for something else
6. No, used on something other than home
7. In the first box "How much was used on the home?"  The initial loan amount minus the amount used for something other than the home.   Example, you refinanced and new loan amount is $225,000; you took $25,000 and used on something other than the home.  The box amount will be 200,000.
8. Do not check the paid off box
9. In the bottom box enter the balance of the loan at the end of 2022.  Assume 210,000 in my example.

TurboTax will then calculate the ratio of your qualifying average loan balance (A) / total average loan balance (B) and multiply that ratio by your interest paid.  Continuing with the example.

The qualifying average loan balance (A) is 200,000.  The amount used on the home which has not been reduced since the 25,000 nonqualifying loan has not been paid off yet.  

The total average loan balance (B) is figured by finding the average balance of each loan type and adding them together.  In our example the nonqualifying loan average is (21,000 + 10,000) / 2 =   15,500  added to the qualifying average loan balance 200,000 + 15,500 = 215,500 (B).  

So, (A/B) is 200,000/215,500 = .9280   .9280 x interest paid (Box 1 amount - 10,000) = 9280 deductible interest.