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?
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.
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.
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.
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:
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
@ReneeM7122 please read the question posed on the thread, before copy-pasting a useless generic reply
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.
@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?
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.
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.
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.
Thanks for the info. I will try that and i will get back to you.
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,
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,
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.)
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?
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.
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?
The IRS advises that you calculate the Average Mortgage Balance for each loan separately and add together.
Click this link for more info on Table 1. Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year.
The concern is how do we calculate the average balance for both the mortgages.
There are 2 methods listed and the first 2 (first and last balance divided by 2 / total interest paid by interest rate) cannot be used as the criteria listed for those will not satisfied.
This leaves me with only the third option (Statements provided by your lender).
The question now is do i divide the total of average balance for each month (with 0 for months that i didn't own the home) by 12 or do i divide it by the number of months i owned the home (say 6 for the home i sold and 9 for the new home i bought)?
Obviously, dividing by 12 would be beneficial and put me well under 750K (because it was only for 2 months that my combined mortgage was above the 750K).
But I am not sure how to interpret the IRS rules with this 3rd method.
You should use the number of months you actually had home during the year, secured by the loan.
For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year.
If your lender can give you your average balance for the year, you can use that amount.
I'm a tax attorney, and I hate to tell you this, but the table in 936 is 100% dead wrong. Using it will hurt you BADLY if you refinance.
The average balance of a loan for the year is NOT the starting balance plus the ending balance divided by two, UNLESS you had the loan for the entire year. If you only had the loan for part of a year, then the average balance is the starting plus the ending multiplied by the number of days you had the loan and divided by 365.
Let's take an example. Mary takes out a $750,000 interest-only bridge loan on January 1 to buy a new house. For the first six months of the year, she pays $10,000 in interest (includes origination fee interest). She then sells her old house, and on July 1, the $750,000 is refinanced into Loan 2 with no cash-out, for which she pays $1,500 in interest for the remainder of the year. Let's say her ending balance is $740,000.
She never had more than $750,000 outstanding, so all $11,500 is deductible.
The IRS worksheet, however, gets this VERY wrong. It would have you ADD the two loans together as if both were in effect the whole year, so that Mary's acquisition debt is $750,000 + $745,000 = $1,495,000. Then it would apply the $750K limitation and only let her deduct about half of the interest she paid. Insanity - and wrong.
Unfortunately, TurboTax does the same thing.
To make it work correctly, you have to enter only ONE loan into Turbotax. In box 1, you put the TOTAL interest you paid for both loans. In box 2, you put the origination date of the earlier mortgage. Then you give the starting balance of the first mortgage and the ending balance of the second mortgage. That gets things right.
It's unclear what the IRS would have in mind, but in theory, the right answer is as follows:
*Compute the average balance on both loans every month (every day would be better, but that's going too far). You can take the balance at the beginning of the month and end of the month and divide by two to get an approximation if the bank doesn't tell you your ADB for the month.
*For each month, add the two average balances together to get a total monthly balance
*In 10 of the months (if I recall your dates right), you will have a monthly balance less than $750K. In 2 of the months, you will have a monthly balance higher than $750K
*For the two months with a balance higher than $750K, compute the fraction 750K / total monthly balance
*Use 1 (100%) for the ten months and your fractions for the two months. So (10+x+y)/12, where x and y are the fractions (expressed as decimals) for the two months.
*The result will be the fraction of your debt you can deduct.