I purchased a new home and converted the original home to a rental. For Schedule A, does "home acquisition debt" include the sum of both home loans or just the new home?

[JeffreyR77]

It depends. 

When did you purchase the new home and when did you convert the former primary residence to a rental? 

Your acquisition debt likely includes a part of the original primary residence note before you converted the property to a rental. 

After you converted it to a rental, the mortgage interest will be reported on Schedule E, not Schedule A. 

Prior to conversion, it will be reported on Schedule A.

[taxnewbie03]

New home (1mm) purchased in June 2020. Converted rental home (700K) was available to rent September 2020 and rented November 2020. I have pro-rated the mortgage interest on Schedule E for September to EOY for the rental. I am reporting the Jan-Sep 2020 mortgage interest on Schedule A. However, for the purpose of the mortgage deduction cap, should the home acquisition debt be 1mm or 1.7mm? Thanks.

[Carl]

For Schedule A, does "home acquisition debt" include the sub of both home loans, or just the new home?
It depends. I'm not exactly clear on just exactly what's what here. So I'm making some assumptions.

If you work through the program the way it's designed and intended to be used, you will deal with the home that was converted to a rental property first. (this is important.)  Note that depending on your specific selections, and assuming you elect to have the program "do the splits" for you, between SCH E for the period of time it was a rental, and SCH A for the period of time it was your primary residence, you'll see in the small print when you get to the "your home" section under the deductions and creidts, that it informs you that it already has things like the mortgage interest and property taxes for that home that is now a rental.

So in the "your home" section you should only be entering the 1098 for the new home that is "now" your primary residence.

Again, assuming you elected to have the program do the splits for you, you should not have to deal with it yourself directly.

I do stress however that you read the small print on each and every screen, as the program can not, does not, and will not split everything. For example, the property insurance on the old home is not deductible for the period of time it was not a rental. So it will be up to you to prorate the insurance yourself and enter the correct amount that is deductible as a rental expense, in the SCH E section of the program.

[taxnewbie03]

I did do the rental property section first. However, there were no options to allow the program to do the splits for me. Likewise, there is no small print in the "your home" section that informed me that it has the mortgage interest / taxes on the rental. As a result, I pro-rated all of the amounts manually and enter both 1098s under "deductions and credits". When I enter the "outstanding mortgage principal" amount of 700K I strongly believe the program is assuming a home acquisition debt of 1.7mm when it calculates my mortgage deduction. I have spoken to multiple TT Live representatives. One has guided me to enter zero outstanding mortgage principal and other says I should enter the 700K. It sounds like from your comments that using a 1.7mm value is not correct, and TT should be picking that up. I will go through again to make sure I am not missing any fine print. However any other tips/suggestions are much appreciated. Thank you.

[taxnewbie03]

Anyone have a sense what the home acquisition debt should be in this case? Once I know that, I will know how to proceed. Thank you!

[Carl]

The home acquisition debt is what you paid for the property when you "originally" purchased it. Added to that could be the cost of any property improvements you paid for "after" you purchased it, but I suggest you add property improvements as a physically separate asset. Otherwise, the program will not correctly figure the land value to structure value ratio for depreciation.

[taxnewbie03]

Hi Carl. Does home acquisition debt include my converted rental home or just the new one that was purchased? Or is it the sum of both? That is really what I am trying to understand. Thanks.

[Carl]

Deal with one real estate property at a time. If you own 50 homes, your "home acquisition debt" is what you originally paid for the one single specific home you are dealing with in the TurboTax program at this moment in time. The other 49 homes will be dealt with later, one home at a time.

[taxnewbie03]

Going along with my example, I see TurboTax is calculating my mortgage interest deduction as 750K/(700K+1000K) or 44% ratio to the mortgage interest I paid (adjusted for what I allocated to the rental). I was expecting something closer to a 750K/1000K = 75% ratio. Is 44% approximately correct, or have I mis-entered something along the way? Thanks. 

[Carl]

The way it's done per IRS requirements is screwy. They don't make it simple. (on purpose I think.) I suggest you work back through and double-check your selections and entries. If all looks okay, then leave well enough alone. The thing to keep in mind is that with each mortgage payment you make, more of each payment goes to principle, and less of each payment goes to the interest.

The split you're dealing with between the time it was your residence and the time it was a rental is something you deal with only in the first year the property is converted to rental. After that, this split won't occur again unless and until the tax year you change it back to personal use.

It is perfectly possible also, that in that first year the interest allocated to the SCH A plus the interest you pay on your new primary residence will exceed the $750K threshold. But for that to happen depends on several factors such as when you closed on the purchase of the new home. Closing late in the year generally means you paid less interest, and that alone could keep you under the $750K threshold.