Can we modify Box 2 of 1098 for owner-occupied Duplex with one unit rented out?

[georgina1818]

Hi all,

We purchased a duplex last year, where we occupy one unit and rent out the other unit. Both units have the same square footage (so, it's 50% - 50%), and we took out a loan of 2M for the entire property. We received one 1098 statement for entire property from our bank.

We have already completed the rental income part, where we have "scaled" the mortgage interest and property taxes by allocating 50% of what's written on 1098 and what we paid in property taxes. Given what I've read, this should be correct.

We are now at the "TAX BREAKS" section, and specifically the "Home Mortgage Deduction" part where we're asked to get over the details from 1098. My question now is: Shall we use the numbers provided by the 1098 (which covers the entire property and hence both units), or can we just input 50% of what's written on the 1098's to Box 1 (Mortgage interest) and Box 2 (Outstanding Mortgage Principal)? I see that, under Box 1, I can tick the box "The interest amount I entered is different than what's on our 1098", so I could modify Box 1. However, there is no such option for Box 2.

I think modifying Box 2 would be important for us since then the effective mortgage amount is 1M (instead of 2M), and hence would increase our deductions. Furthermore, in CA, mortgage interests on 1M would be fully deductible (as opposed to only 750k federal). However, I'm not sure if by doing that, i may cause any issues with IRS and CA FTB since I assume they have a copy of our 1098.

Thank you for your help - your insights are much appreciated

[ColeenD3]

Yes, you can include the personal portion on Schedule A and the rental portion on Schedule E. Yes, you can indicate that the amount in Box 1 is different. The box two amount covers the whole property and can't be adjusted.

[georgina1818]

Hi @ColeenD3 , thanks a lot for getting back. Not being able to modify Box 2 of 1098 is a bit of a bummer since, from what I understand, that will reduce our deductions :-(. For example, assuming a principal of > $750k, the federal deduction is computed as (Box_1 / Box_2 * 750k). Having $1M or $2M in Box_2 would make a big difference.

Given that that I cannot modify Box_2, I wonder if I can just put the entire property's value into Box_1 (instead of just our units'), since this should give result to the right amount of deductions? For example, in our case, the federal deduction for our own unit should be [ (50%*interest_both_units) / (50%*principal_both_units) * $750k ], which equals [ interest_both_units / principal_both_units * $750k ].

Would that be allowed? Thank you 🙂

[Carl]

One thing I question is just "how" you are reporting this rental on SCH E. Are you reporting the rental unit as a physically separate item on the SCH E? Or did you select the option for "duplex and I live in one of the units."?

In other words, if you're reporting the rental unit as it's own separate entity, then you are claiming 100% of the expenses that apply to that entity. Whereas if you're reporting it as "a duplex and I live in one of the units" then either you are entering 100% of your expenses for the entire structure and the program is applying 50% of those expenses to the SCH E. Or you are doing the math manually and entering the actual costs for the rental side only, as 100% of those costs apply to the rental.

[georgina1818]

Hi @Carl , we selected "Rented a unit in multi-unit where you live". To the question whether we want TurboTax to divide the rental-related portion, we selected "No, I'll do the math and enter only the rental-related portion", since we had expenses that were exclusive to the rental unit, while others were shared.

Curious, how does the above affect how I should complete the 1098 information when it comes to our deductions?

[Carl]

Curious, how does the above affect how I should complete the 1098 information when it comes to our deductions?

It doesn't. You'll enter the percentage of box 1 that applies, and the full amount shown in box 2 if asked for it there.  There is no $70K limit for rental/business property.

You'll do the same for SCH A under the Deductions & Credits tab in the Your Home section where there is a limit.