Deductions & credits
Since TurboTax does not handle the mortgage interest deduction limitation in a year that a home is bought and another home is sold when one or both mortgage balances are over the limit, you need to complete the calculation of allowable interest yourself and enter an adjusted interest amount when prompted. Be sure you keep these calculations with your other tax documents in case you need to document the interest deduction.
The necessary calculations are outlined in IRS Pub 936, Table 1. The lines referred to below come from Table 1.
Publication 936 provides several methods to calculate/determine your average loan balance for a loan.
Once you have calculated the average loan balances for each loan separately (lines 2 and 7), add the averages together for the total average loan balance (B) (line 12).
Divide your loan limit (line 11) by the total average loan balance (line 12) to get a ratio (A/B) (line 14). That ratio is multiplied by the total amount of interest paid (line 13) as shown on your Forms 1098 to arrive at the deductible portion (line 15).
When your mortgage interest is being limited, TurboTax displays this message and provides an "Adjustment" box for you to enter your calculated interest deduction. See a screenshot of this page below.
