topic Bug in TurboTax? Mortgage interest deduction limits on second home. in Deductions & credits

Bug in TurboTax? Mortgage interest deduction limits on second home.

pb5712 — Mon, 08 Mar 2021 23:15:44 GMT

John owns 2 houses (primary and second home, no rental):

- House A: outstanding mortgage balance $800k; interest paid $20k

- House B: outstanding mortgage balance $500k; interest paid $10k

3 scenarios:

1) House A and B were both bought before Dec 15, 2017. TurboTax correctly applies $1M limit.

($20k+$10k) * $1M / ($800k + $500k) = $23,076 interest can be deducted

2) House A and B were both bought after Dec 15, 2017. TurboTax correctly applies $750k limit.

($20k+$10k) * $750k / ($800k + $500k) = $17,307 interest can be deducted

3) House A was bought before Dec 15, 2017. House B after Dec 15, 2017. TurboTax applies $1M and $750k limits to each individual mortgage.

$800k < $1M and $500k < $750k, so TurboTax treats total $30k interest as deductible, without limits.

BUG?????

I believe in the last scenario TurboTax should apply Table 1 from Part II of Pub 936, but the software seems to just blindly treat *all* interest as deductible. Can someone confirm this is a bug?

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

jcrane0513 — Tue, 09 Mar 2021 00:45:53 GMT

Thank you for posting this. I am having the same problem and agree that the outcome does not reflect the intent of the rules. Would love a fix to this as it's the last item to complete our tax return.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

agingclimber — Thu, 11 Mar 2021 02:29:07 GMT

Yes, I have the same problem with Scenario 3). TurboTax actually calculates the limited deductible interest ($18,462 in your scenario) correctly in the worksheets, but then it does not transfer that amount to Schedule A, as the worksheet says it should. Looks like a coding error to me, and I have not found a way to override it.

A follow-up question: Under scenario 3, if John chose to not deduct the interest he paid on Mortgage B, then he could deduct the full $20k he paid on Mortgage A. That is, he gets penalized for having the second mortgage. This seems to be a perverse consequence of that worksheet in Pub 936. So, if John paid interest on two mortgages, can he selectively deduct one and not declare the other? I cannot find any information on that.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

pb5712 — Mon, 15 Mar 2021 16:49:12 GMT

So where are TurboTax experts on this forum?

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

agingclimber — Mon, 15 Mar 2021 20:51:50 GMT

I was wondering myself what happened to the experts. I spent something like two hours on the phone with them last week, but did not get a resolution. Eventually they told me someone would contact me by email by the weekend at the latest, but that did not happen. I'm disappointed; it's such a well-posed problem, you'd think they'd address it quickly once it's been pointed out.

Rather than spending another two hours on the phone I decided to do the following: Calculate the limited deductible interest manually, and then feed Turbotax modified interest payment data such that the amount on Line 8a of Schedule A comes out correctly. This of course means the worksheets are wrong, but at least the tax return will be correct. It's very annoying that this is necessary.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

ReneeM7122 — Mon, 15 Mar 2021 23:30:31 GMT

Please refer to the following when entering multiple 1098s:

How do I handle multiple 1098 mortgage forms?

If you have multiple 1098 mortgage forms, you’ll enter them one at a time. After going through the steps with the first one, you can add a lender when you get to the Mortgage deduction summary screen. (In the case of a refinance, it's best to enter the 1098 from your original loan before the 1098 from your refinance.)

But, if they're both from the same lender, and one of them has the “Corrected” checkbox marked at the top, enter the corrected 1098 and discard or shred the other one.

What do I do if I have multiple 1098s from refinancing my home debt?

If your total home debt is under $375,000 ($250,000 for married filing separate) there is nothing new for you to do in 2020. Enter each 1098 as you normally would.

Home Debt Over $375,000

Under tax law, you are limited on the amount of home interest you can deduct. The limit is based on the loan amount and date of the origination of debt. We want to make sure we calculate this correctly for you.

If you refinanced last year, you’ll have a Form 1098 from your previous lender and one from the lender you refinanced with. You’ll need both forms.

Follow these steps to enter your mortgage information:

Gather all of your 1098 forms related to your refinance (the form from your original lender and the form from your new lender)
Grab a calculator and add together the box 1 amount from each form. Enter the total in TurboTax as Box 1 Mortgage interest.
Add the Box 5 amount from each form and enter the total as Box 5 Mortgage insurance premiums. (If you weren’t required to pay mortgage interest, these boxes will be blank on your forms and you won’t enter anything.)
Add the property tax paid from each form and enter it in the Property (real estate) taxes box.

Next, finish adding info for boxes 2, 3, 7, and 11 using Form 1098 for the original loan.

What if I have more than two 1098s?

You should combine all of the 1098s directly related to the refinance and enter it as one 1098. An example of this is if you refinanced two loans into one loan. Any 1098s not directly related to the refinance should get entered separately.

What if I paid points?

Points on Loans Paid Off in 2020: Enter the points on your 1098 you have started and mark you paid off the loan when promoted.

Points on Loans on New Loans: You will want to enter a separate 1098 to cover these points paid. When prompted, enter 0.00 for Boxes 1, 2, 5, and the Property (real estate) taxes box, and checkbox 7, as you’ve already entered the details on your first 1098. For Box 3, add the date in 2020 when the loan originated.

Here is a TurboTax FAQ about deducting Mortgage interest.

@pb5712

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

pb5712 — Mon, 15 Mar 2021 23:55:20 GMT

@ReneeM7122 please read the question posed on the thread, before copy-pasting a useless generic reply

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

agingclimber — Tue, 16 Mar 2021 00:00:08 GMT

Thanks, Renee, but this does not address the problem stated by pb5712's Scenario 3: If one follows the steps outlined in your reply, then TurboTax will do the worksheets correctly, but then put the wrong amount in Line 8a of Schedule A.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

galenbeers — Mon, 22 Mar 2021 17:51:51 GMT

@ReneeM7122 My situation, proposed solution and questions:

I had 2 "loans" in 2020 (for which I have interest and points to deduct).

Loan 1 for Home 1 - I sold this home in December of 2020. The loan originated before 2017 and was for less than $1MM. I received 1 1098 from the Bank (we'll call bank A)

Loan 2 for Home 2 - I purchased this home in August 2020. The loan originated in 2020 and was for more than $750k. Adding to the issue, Loan 2 was sold to another bank in 2020, so I received 2 1098s for this loan (from Bank B and C)

Here is the guidance I received on how to solve this from TT Premier desktop

For Loan 2 (that was sold to another lender):

1. Add the Mortgage Interest Received, Mortgage Premiums (if any) and property tax amount from each form and enter the totals for the original lender only in TT.
2. Enter the remaining items from the original lender 1098 loan for the Outstanding Mortgage Principal (Box 2), Mortgage Origination Date (Box 3), and the checkbox on box 7 (address of property securing the mortgage)

For the multiple loans (Loan 1 - before 2017 and less than 1MM and Loan 2 - after 2017 and more than 750k)

Home 1 ($1mm limit)

1. Calculate the average balance - (beginning balance + ending balance)/2
2. Calculate the percentage to deduct -1,000,000/ average balance = 1 (do not go over 1 or 100%)
3. Calculate the deductible amount of Interest - $total interest * 1 (Report on Box 1 on the 1098)
4. Deductible Interest =$18,000 (Enter for Interest on Box 1 on 1098 for new home)
Home 2 ($750,000 limit)
1. Calculate the average balance - (beginning balance + ending balance)/2
2. Calculate the percentage to deduct -750,000/ average balance (do not go over 1 or 100%)
3. Calculate the deductible amount of Interest - $total interest * percentage to deduct (Report on Box 1 on the 1098)

Box 2- Make sure you enter $0 on each 1098.
Total Amount of Interest Deducted on your Tax Return = deductible amount of interest on Home 1 + Home 2

Questions

Do Check the box in TT that asks if the amounts I am entering for box 1 are different than my 1098 (and if so, what do I enter in the subsequent notes?)

What about points, I paid points for Loan 2, do I just enter those for Loan 2 in TT ?

Is there a knowledge base or expert that know about this issue that can weigh in on if the software will eventually be supporting this vs asking users to implement the workarounds above?

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

ja122580 — Wed, 24 Mar 2021 18:59:49 GMT

I tried that but it seems both properties are on the same folder. I couldn't find two different entries like my previous filed taxes in 2019.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

ja122580 — Wed, 24 Mar 2021 19:04:35 GMT

One more thing, I have two different lenders and the two properties are on two different locations but in the same State. I just can't figure out how to separate the two in the tax form of Turbo. Please help.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

agingclimber — Wed, 24 Mar 2021 19:20:07 GMT

Go to

Personal -> Deductions & Credits -> Mortgage Interest, Refinancing, and Insurance

and enter the first loan. When you get the `Home loan deduction summary' screen you'll see a button labeled `Add a lender'. Click that to enter the second loan. (It works even if the second lender is the same as the first lender.)

If you do that, your worksheets will most likely be correct. But beware: the entry on Line 8a of Schedule A may not be.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

ja122580 — Mon, 29 Mar 2021 13:54:39 GMT

Thanks for the info. I will try that and i will get back to you.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

ja122580 — Mon, 29 Mar 2021 14:19:24 GMT

Thanks.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

israelforst — Sat, 08 May 2021 17:47:34 GMT

Hi All,

I have a similar issue with 2 hours and the turbo tax doesn't seem to put the right mortgage interest on Schedule A.

Any expert here to confirm what the solution should be?

Thanks,

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

israelforst — Sat, 08 May 2021 17:52:41 GMT

Hi, can you share the correct way how to calculate the 2 house situation?

I have the first house bought before 2017 and my beginning principal balance was around $0.8m and ending balance of 2020 was around $0.6m. mortgage $25k.

My second house was bought in August 2020 with a balance of $0.4m and then a ending balance on Dec. 31 2020 of $0.3m, mortgage of $1k.

I am not sure if I have $1m or $1.1m cap on the indebtness either.

Thanks,

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

agingclimber — Sat, 08 May 2021 21:50:49 GMT

The relevant worksheet for your situation is Table 1 in Publication 936. It's pretty self-explanatory, and it produces your qualified loan limit on Line 11 and your deductible mortgage interest on Line 15.

Turbotax does the worksheet calculation correctly, but then it puts the wrong amount in Line 8a on Schedule A. (At least that was the case when I filed my taxes, which was quite a while ago.)

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

jcrane0513 — Mon, 10 May 2021 00:11:42 GMT

Ok. I'm back to my returns and decided I would enter the 1098s as reported to me. Since TT STILL fails to compute the limitation correctly, I computed it manually offline. Then I went to Schedule A in TT to override the amount of interest and points deductions.

CA properly computes the interest limitation so I don't need overrides there.

Then I tried to e-file and TT will not allow me to do that since I overrode amounts on Schedule A even though the amounts I entered are correct. It tells me to delete the overrides, which will produce excess tax deductions and a greater refund than I deserve. I wonder if I filed this way, if TT would handle my audit, interest, and penalty costs gratis since their system is the point of failure.

I tried another route which was to delete all 1098s and then enter a combined 1098 for the two loans with amounts necessary to deliver the correct Pub 936 limitation. This works for federal, BUT then CA is not correct!

Absolutely ridiculously frustrating! If I'm venting while an obvious answer is out there, it's because nothing on this community appears to address the problem.

Has anyone found a workaround to solve correct deduction for fed and state and allow e-filing?

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

agingclimber — Mon, 10 May 2021 00:27:42 GMT

I also tried to override the Schedule A entry, but could not make it work. Eventually I did what I described in my March 15 post: I fed TT fictitious interest payment data (while NOT checking the "amount is different" box) designed to make the deduction on Schedule A work out correctly. This means my worksheets within TT are wrong, but everything submitted to the IRS is correct. My state return is for OR, and the above procedure did not result in any problems. I don't know what would happen with a CA state return.

Agreed that it's absolutely infuriating that Intuit just ignores this issue, months after several users have pointed it out.

Re: Bug in TurboTax? Mortgage interest deduction limits on second home.

tsrkum — Tue, 25 Jan 2022 22:34:19 GMT

I have a question in this regard as to how Turbotax calculates the interest limitation. I am not sure if I am reading the pub 936 correctly.

In my case, i had a primary home which was brought prior to December 2017 and had a beginning mortgage balance of 292K as of Jan 2021. I bought a new home - closed on March 31, 2021 with a starting mortgage balance of 623K and made it as my primary home with an ending mortgage balance of 614K as of end of 2021

I sold the old home and it closed on June 4,2021 when the mortgage balance was roughly 290K.

For these 2 overlapping months, my mortgage balance was above 900K. I am not finding a clear solution explained by IRS for these partial overlap scenarios.

Which one of this is the right way to figure out the average mortgage balance for 2021 to arrive at the interest deduction limit.

Option A -

Irrespective of the fact that my mortgage balance shot over the 750 k limit for those just 2 overlapping months - Should I use this

(Total Interest paid in 2021) * Average Mortgage balance of the first home (~291K) / Average Mortgage balance of the 2nd home (~617K)

Option B -

Calculate average monthly mortgage balance for each mortgage for all the 12 months (adding the monthly balance for Mortgage A and Mortgage B for each month, then sum up all the 12 months and divide by 12 to arrive at the average mortgage balance for the year) . With this, the monthly balance would be 0 for certain months for the old home and ditto for the new home (the months when i didn't own it) and the end result would be that my average mortgage balance for the year would still be under 750K rendering the entire interest as deductable.

Not sure which approach is right.

Any thoughts?