Perhaps. You will have a limited deduction. You can get the right results for both federal and state by entering the mortgage interest using the method below.
What if I have more than two 1098s?
You should combine all of the 1098s directly related to the home mortgage and enter it as one 1098. A sale or refinance of mortgages is a perfect example of when this will be the best action. The key is that all of your mortgage interest is included with your tax return if your outstanding principal loan balance is below the maximum of $750,000. Keep all of your Forms 1098 with your tax return for the details.
Add each box that has an entry and enter it in the same form with the mortgage interest.
NOTE: The outstanding loan balance should be the actual loan balance, do not add that together from each form. Use the most recent lender's loan balance when requested for that entry.
*The outstanding mortgage on the rental immediately before you converted it should be used. First figure out that amount. My example is using your numbers without taking the rental period into account. Once you figure that out, you can change the first mortgage number in this formula with the correct balance on the date it was converted to a rental property.
$750,000 minus the mortgage balance on the first home (using your example) $124,229.73* leaves $625,770.27 balance that can be used from the second home. ($625,770 divided by $750,000). This would give the mortgage interest for the second home.
- First home mortgage interest plus second home mortgage interest = allowable mortgage interest on Schedule A. The remainder paid is not used.
- IRS Publication 936 - Worksheet 1, page 14
Note: Some of the mortgage interest will be used on your itemized deductions and the remainder will be rental mortgage interest. Be sure to enter the rental portion manually due to your limitation and do not enter the full amount in the rental entry.
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