I refinanced an existing mortgage in July 2020. TurboTax prompted me to combine the Box 1 mortgage interest from both 1098 Forms in the worksheet for the loan I paid off. No problem there. However, TurboTax also prompted me to enter the Box 2 Outstanding Mortgage Principal for the paid-off loan (with a 1/1/20 Box 2 balance of $730,000 (rounded)), plus the payoff amount at closing ($720,000). For the refinanced loan, I entered the new mortgage Box 2 amount ($625,000 at origination) and the 12/31/20 balance ($615,000). The supporting loan worksheet appears to assume both loans were outstanding throughout 2020, calculating an average 2020 mortgage balance of $725,000 + $620,000 = 1,345,000. Since the IRS disallows interest deductions on loans over $750,000, the software limits my interest deduction to $750,000/1,345,000 = 56% of the actual interest I paid. What's the work-around for this??? Leaving Box 2 blank gives an error.
