Mortgage Interest Deduction for converted property with mortgages over $750K

[sbstnshane]

Background:

I have a property which was my primary residency from January until end of August (Property A). I bought another property and moved to it in September as my primary residency (Property B). I kept Property A but starting September it was made available for rental. I was not able to get a tenant at all during 2020.

Now, Property A had an outstanding mortgage balance of $529K by the end of the year. Property B had $1.2M. Total interest paid for Property A in 2020 was $20K and for Property B $8.6K.

Question:

Is it right if I claim full Schedule A interest deduction from January to August for Property A ($13.3K) and the remainder ($6.7K) in Schedule E for the rental property AND limited Schedule A interest deduction from September to December for Property B ($8.6K x ($750K/$1.2M) = $5.5K) for a total Schedule A interest deduction of $18.9K and Schedule E deduction of $6.7?

If so, how do I do this in TurboTax? When I enter the total mortgage interest paid from my two 1098s, the 2 mortgage balances are totaling $1.7M and reducing my interest deduction because of the $750K limit...

[DianeW777]

It appears as though you have the right idea about the calculations for your home and rental. Use the information provided to confirm you have followed the steps correctly. You will average all loans for the year (begin on page 11 of the worksheet instructions below).

Figure the average balance for the current year of each mortgage you took out on all qualified homes after December 15, 2017, to buy, build, or substantially improve the home (home acquisition debt). Add the results together and this will be included on your Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year.  In this scenario it would be best to use the worksheet to enter the correct allowable mortgage interest for your personal residences.  Keep the worksheet for your records.

• IRS Publication 936 (page 12)
• Also this article is available for assistance: What to do if I have multiple 1098s

The rental (Schedule E) should be entered and included on your 2020 tax return since it was available for rent, placed in service, in September, even though you did not have a tenant as of December 31st. As long as it was available and advertised as available it is considered to be placed in service.

• Enter the mortgage interest paid from September - December on the rental schedule directly.
• Indicate the property was converted from personal use to rental use
• When asked if the property was rented all year answer 'Yes' 
• When asked if it was rented at fair rental value answer 'Yes'
  • These questions are asked to establish the rental period and whether the expenses are allowed in full. 
  • As long as there was no personal use by yourself or a family member after it was available for rent then these are the correct answers for TurboTax to know how to treat the property