Mortgage Interest - Rental vs Personal

[Once a year Accountant]

Hello Turbo Tax Community:

FYI:  My mortgage Interest is ~ $7000

I am hoping someone can answer this question.  My taxes are relatively simple, I own a 2-family home and I live in one of the units and rent out the other unit.  I have been using TurboTax or years and I have always entered my Mortgage Interest in the Income section “Rental Properties and Royalties Section”  of Turbo Tax. 

I usually just use 50% of all expenses so Turbo -Tax automatically assigns what goes towards the “Personal” side of things.  When I enter my total Mortgage Interest here (Rental Properties an Royalties section) you are NOT SUPPOSED to enter any 1098 information in the Personal deduction section of Turbo Tax. 

So just for hell of it this year I did an experiment and did my taxes two ways 1) like I always have (discussed above) and 2) I did not ENTER any mortgage interest in the Rental and Royalties section and entered it all in the Personal Deduction section.

Doing my Taxes by entering my mortgage Interest in the Rental and Royalties section (using the 50% split) my expected Return is $950

When I enter all my mortgage interest in the Personal Deduction Section my expected return is $1500.

In both instances when I look at the completed Return PDF of my Return the Itemized Deductions worksheet has $7000 for Mortgage Interest.

Why is there such a big difference in my expected refund ?

 Is it because when you enter it in the Rental and Royalties section it only deducts the $3500 of my personal deduction for this year and the $3500 for the Rental is at a Depreciation Level ? 

I hate to think that I have been over paying uncle Sam all these years.  ☹

[SantinoD]

It depends on if your rental losses are considered passive losses, it won't deduct from your other income, so essentially you are not utilizing your full interest deduction. passive losses can only offset passive income. But the loss is carried forward and applied to passive income in future years.

There are some exceptions. The first exception relates to your Modified Adjusted Gross Income (MAGI). If your MAGI is $100,000 or less for the tax year, you can deduct up to $25,000 of rental loss. This means you can apply your rental loss, up to $25,000, against any income, whether it is passive or not. However, you must have actively participated in the rental activity and have more than a 10% ownership interest in the property.

You may also be able to take a reduced amount of the rental loss if their MAGI is more than $100,000. The $25,000 deduction allowance is phased out from $100,000 – $150,000. This means that the full $25,000 deduction allowance can be taken until your MAGI exceeds $100,000. As your MAGI nears $150,000, the $25,000 deduction allowance will be reduced. Once your MAGI reaches $150,000, the deduction allowance is no longer able to be taken.

If you enter the full interest deduction as a personal itemized deduction and you indicate in the program that you rent out a portion of your home, the software will make the proper allocation for you depending on the percentage of rental use area. This means that you can't take the full interest on the Schedule A itemized deductions, it has to be allocated properly to the rental use area percentage. 

If going back and amending previous years gives a significant amount of money back, I advise amending those years. You can go back 3 tax years to claim a refund.