Calculating Average Mortgage balance for 2 loans

[JoannaB2]

No.  You need to report all 1098 Mortgage Interest Statements on your income tax return. The mortgage interests may be deductible and are entered on Scheduled A (Itemized Deduction).

See, what do I do if I have multiple 1098's from refinancing, link.

[giantsbaseball]

I'm sorry, but that link is not correct. It states that you can't deduct interest on anything over 350k in home debt, 250k if Married Filing Separate. That's simply not true. The max is 750k for any mortgage after dec 2017, 375k for Married Filing Separate, and there was no change to tax year 2020. See IRS Publication 936.

[giantsbaseball]

Also, you do not have to report all of the mortgage interest that appears on forms 1098. Only the amount that you are eligible to deduct. There is only one place where this appears on your return...schedule A. Your automatic interview is just a means to get the right number to appear on that schedule. How do you not know this?

[JamesG1]

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

Please sign up for email notifications when an update related to this issue is available.

See this TurboTax Help.

[jaystee]

Can I calculate my average mortgage balance according to the IRS publication and use that as the mortgage balance in TurboTax? Seems to be a manual way to get the correct balance.

[DaveF1006]

 Yes you would be able to use the Table 1. Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year. This is included in the following IRS link. 

[baheil]

is turbo tax ever going to add the "interest paid divided by interest rate" method so i have correct supporting documentation to prove i didn't have to limit my home mortgage interest?  Right now i only see a worksheet that shows i need to limit my home mortgage interest.

[ReneeM7122]

You are correct, currently there is a worksheet.  Here is a TurboTax article about how TurboTax handles mortgage interest.

@baheil

[mwahl0]

Hi, can you please post a link to the article? I don't see one in your post.

I would also like to put a plug in for TurboTax fixing their software to correctly account for multiple mortgages held at different times during the year (e.g. for someone who sold one home and then bought another during the year). The current default method vastly underestimates deductible interest. 

Thanks.

[ReneeM7122]

Here is the TurboTax link that explains how to handle multiple 1098 forms.  You are correct, the interest is a key factor when you have multiple mortgages.  

Unfortunately when you refinance your mortgage and combine a home equity loan, for example, the mortgage interest from the new loan isn’t tax deductible. Only the loan amount when you originally acquired the property remains deductible.

https://www.irs.gov/publications/p936  No matter when the indebtedness was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren't used to buy, build, or substantially improve your home.

It is important to follow the steps carefully so that the interest is handled correctly.  

@mwahl0

[galenbeers]

Hi @ReneeM7122 , you seem to be the resident expert (or person posting most about this topic) so I figured I would pose my issue to you and get whatever advice you are able/willing to offer. 

I had 2 "loans" in 2020. 

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

Loan 2 - for a home (main) I purchased 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)

I have looked all over TT support and the "best practices" to deal with this have varied quite a bit. There also seems to be confusion on what exactly TT software can handle or not (as most of the solutions have been described as "workarounds"). 

I am using TT Premier desktop and interestingly found these knowledge kernels in the on-demand help which seem to address my questions specifically (see below). But I am hesitant to implement a "workaround" unless it is fully supported by TT as the only solution they have (or will have). Can you offer any help here or direct me to a person/team that can help solve this for good (for me and most likely lots of other TT users)?

What if I have multiple 1098s due to my lender selling my loan to another lender?
Lenders/Banks buying and selling your loan can be frustrating! It could also result in them sending you multiple 1098s for the same
mortgage. If this is applies to you combine the 1098s for the same loan to get the right deduction. Here's how:.
1. Gather all of your 1098 forms related to your mortgage. These are the forms from your original lender and your new lender.
2. Grab a calculator and add the Mortgage Interest Received (Box 1) amount from each form and enter the total in TurboTax as Box 1
Mortgage interest.
3. Add the box 5 Mortgage Insurance Premium from each form and enter the total as Box 5 Mortgage insurance premiums. (If you weren't
required to pay mortgage insurance premiums, these boxes will be blank on your forms and you won't enter anything here.)
4. Add the property tax paid from each form and enter it here next to Property (real estate) taxes paid.
5. Enter the remaining items from the 1098 loan that was paid off in 2020 for the Outstanding Mortgage Principal (Box 2), Mortgage
Origination Date (Box 3), and the checkbox on box 7 (address of property securing the mortgage)
Once you're done here, hold on to your forms for when we ask about any points you paid when you refinanced. Points are a fee you pay
to reduce your loan's interest rate. If you paid points, you'll see an amount in box 6 of the 1098 for your refinance.

What if I had a mortgage larger than $750,000 at any time during 2020 with the sale of a home?
Mortgage interest is limited once your loan exceeds $750,000 for a home purchased in 2020. Your old home may qualify up to a
$1,000,000 limit if the home debt originated before December 16, 2017. The $1,000,000 limit is based on when the debt originated and
funds were used to buy, build or improve the home. (refer to IRS Publication 936 for details)
We will walk you through how to do this. Follow these steps.
Input each 1098 separately with the following modifications:
1. Mortgage Interest Received (Box 1) - manually adjust the interest to reflect the interest limit (see step below)
2. Outstanding Mortgage Principal (Box 2) - Enter $0 for Outstanding Mortgage Principal
Manually Calculating Interest:
1. Calculate the average loan size for the old and new home
Find the balance of each loan at the beginning of the year and at the end (either the end of the year or end of the loan)
Beginning Balances -The beginning balance of each loan is on the 1098 on Box 2- Outstanding Mortgage Principal.
Ending Balances- Ending balances would be the payoff amount on your old home (payoff statement or escrow statement) and on the
ending balance on the new home would be found on the January 2021 Mortgage Statement.
Average for each loan would be=
(Beginning balance + Ending Balance)/2
2. Calculate the portion of the interest paid that is deductible depending on when your home was purchased as follows:
Home Bought/Debt originating before December 16, 2017= $1,000,000/ Average Loan amount
Home Bought/Debt originating after December 16, 2017= $750,000/ Average Loan amount
Calculate the deductible amount of Interest-Take the percentage and times that by the actual interest paid as reflected on the 1098. Enter
this amount in Mortgage Interest Received (Box 1).
If you are under the maximum loan limit on a home do not take more than 100% of interest on the 1098.
Example-Over the Loan Limit in the Sale and Purchase Home
Old Home- on January 1, 2020 the old home had mortgage debt of $1,200,000. When the home was sold the amount outstanding on the
loan was $1,100,000 and interest and the total interest paid on it in 202 was $36,000.
New home - Mortgage of $1,000,000 with $10,000 of interest paid. The new loan balance was at $950,000 at the end of the year.
Old Home
Calculate the average balance - (1,200,000 +1,100,000)/2= $1,150,000
Calculate the percentage to deduct- 1,000,000/ Old Home Average of $1,150,000 =.87
Calculate the deductible amount of Interest to Deduct-Interest Paid of $36,000 *.87 = $31,320 (Report on Box 1 on the 1098)
New Home
Calculate the average balance ($1,000,000 + $950,000) /2 =$975,000
Calculate the percentage to deduct- $750,000/ $975,000=.77
Calculate the deductible amount of Interest-Interest paid on new home of $10,000 x .77 = $7,700 (Report on Box 1 of the Second 1098)
Box 2. Outstanding Mortgage Principal - enter $0
Enter the values from the rest of the boxes as you normally would.
Total Amount of Interest Deducted on your Tax Return =$39,020
Example - Over the Loan Limit on Just One Home
Old Home- on January 1, 2020 the old home had mortgage debt of $600,000. When the home was sold the amount outstanding on the
loan was $575,000 and interest and the total interest paid on it in 202 was $18,000.
New home - Mortgage of $800,000 with $10,000 of interest paid. The new loan balance was at $775,000 at the end of the year.
Old Home
Calculate the average balance - ($600,000+$575,000)/2 = $587,500
Calculate the percentage to deduct -1,000,000/ Old Home Average of $587,500 = 1 (do not go over 1 or 100%)
Calculate the deductible amount of Interest - $18,000 * 1 = $18,000 (Report on Box 1 on the 1098)
Deductible Interest =$18,000 (Enter for Interest on Box 1 on 1098 for new home)
New Home- $750,000 limit
Calculate the average balance - ($800,000+$775,000)/2 = $787,500
Calculate the percentage to deduct -750,000/ Old Home Average of $787,500 = .95 (do not go over 1 or 100%)
Calculate the deductible amount of Interest - $10,000 *.95 = $9,500 (Report on Box 1 on the 1098)
Deductible Interest =$9,500 (Enter for Interest on Box 1 on 1098 for new home)
Box 2- Make sure you enter $0 on each 1098.
Total Amount of Interest Deducted on your Tax Return =$27,500

[mwahl0]

Hi, thanks for the response, though this doesn't really address my question. Specifically asking about how to handle a situation where you sell one home, then buy another in the same year. Not refinancing or taking out a HELOC.

Here's a simplified example:

House 1 (primary residence): Own 1/1-6/30, average mortgage balance over that time $500,000, sell on 6/30

House 2 (primary residence): Own 7/1-12/31, average mortgage balance over that time $500,000

The current TurboTax method simply sums the average balances from both mortgages (total: $1,000,000), then calculates that only 75% of mortgage interest is tax deductible ($750,000/$1,000,000). 

However, at no time during the year was over $750,000 of mortgage debt held (since the mortgages were not held at the same time), and so all mortgage interest in this scenario should be tax deductible. There should be an accurate way in TurboTax to account for this scenario. It is not a rare one. 

[JamesG1]

@mwahl0

Perhaps this will be helpful.

In TurboTax Online Deluxe, I was able to enter a home loan on an IRS form 1098 and the second IRS form 1098 for the second home.  In the scenario, the first home was sold on 06/30/2020.  For both loans, I entered a mortgage balance in excess of $500,000 in box 2.  For the second loan, I entered an origination date of 07/01/2020 in box 3.

I was given the full mortgage interest deduction and the Home Mortgage Interest Limitation Worksheet did not add the two mortgage balances together.

The entries were made at Federal / Deductions & Credits / Mortgage Interest (Form 1098).

Entries for the original loan

Do any of these uncommon situations, I entered None of these apply.

Did you pay points, I entered I’ve already deducted.

Was this loan paid off or refinanced, I entered No.

Is this loan a home equity, I entered No, this is the original loan.

Entries for the second loan

Do any of these uncommon situations, I entered None of these apply.

Did you pay points, I entered I didn’t pay points.

Was this loan paid off or refinanced, I entered No.

Is this loan a home equity, I entered No, this is the original loan.

The Home Mortgage Interest Limitation Worksheet may be viewed under Tax Tools / Print Center / Print this year's return.

[mwahl0]

Hi, Thanks for the reply. I'm working in the downloaded version of TT Premier, and when I entered the 1098s as you suggest, it spit out a total average mortgage balance of the sum of the two mortgages. I think unless TT plans to do a fix soon will just have to manually override with the correct average mortgage balance calculated on a month-by-month basis. 

[galenbeers]

Hi @JamesG1 

My situation, proposed solution and questions (and thanks in advance):

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-demand knowledge base) 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?