Calculating Average Mortgage balance for 2 loans

[Cynthiad66]

There is a known problem with Home Mortgage Deduction.  TurboTax is working to fix the problem and the many other issues. There are many changes due to the CARES Act that require software upgrades.  We have not been given an  expected date for the fix yet.  Please check back often to see if you can file your return.

[galenbeers]

Hi @Cynthiad66 

"Check back" where specifically? This has been outstanding for months and its not as though the CARES Act was just put into action... why is Intuit being so quiet on such an impactful issue. Or are we missing something as users? 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 complicated workarounds?

In the absence of proper communication from Intuit, can you address my situation and the proposed solution (that I have had to build through literally reviewing hundreds of support posts)? Hoping to understand if indeed I am using a "best practice workaround" that is backed by an Intuit Expert. 

Situation:

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 (not refinanced) in 2020, so I received 2 1098s for this loan (from Bank B and C). The original loan included points.

Proposed Solution - the guidance I received (on-demand knowledge base and many support posts) on how to solve this in TT Premier desktop

For Loan 2 (to address multiple 1098s for a loan 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 calculating the deductible interest on the 2 loans  (Loan 1/Home 1 - originating before 2017 and less than 1MM and Loan 2 - originating 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. 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 to enter $0 on each 1098.
Total Amount of Interest Deducted on my Tax Return = deductible amount of interest on Home 1 + Home 2 (+ deductible points)

[hihappy2001]

Hi @Cynthiad66 

Just wonder if this average mortgage balance issue has been resolved yet?  I have the same issue as well. 

For Loan 2, When I take the suggested solution below by making the Box 2 as 0, "Box 2- Make sure to enter $0 on each 1098.", then I got an error message when I run the smart check.   But I am OK with the solution for Loan 1, no error message got from TT smart check. 

Please advise how should I fix the error on Loan 2, since TT requires some number on Box 2, I can't put it as zero. 

Thanks

Situation:

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 (not refinanced) in 2020, so I received 2 1098s for this loan (from Bank B and C). The original loan included points.

Proposed Solution - the guidance I received (on-demand knowledge base and many support posts) on how to solve this in TT Premier desktop

For Loan 2 (to address multiple 1098s for a loan 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 calculating the deductible interest on the 2 loans  (Loan 1/Home 1 - originating before 2017 and less than 1MM and Loan 2 - originating 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. 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 to enter $0 on each 1098.
Total Amount of Interest Deducted on my Tax Return = deductible amount of interest on Home 1 + Home 2 (+ deductible points)

[NCperson]

@hihappy2001 -  I would suggest separating the issue of a) how much can I deduct from b) how do i get the answer into TT. 

on the first issue: hate to burst your bubble, but the 'average loan balance' is not a two point average.  

for each mortgage you hold that average is the interest on THAT mortgage divided by its interest rate.  

Sum those results together and that is the 'average loan balance'. 

(it will slightly matter even on the paid off mortgage, unless you paid it off on December 31; big impact on the newer mortgage since you did not borrow until August)

https://www.irs.gov/pub/irs-pdf/p936.pdf

look at page 13 and the middle top of the page.

start there. 

you really only have two mortgages; selling a mortgage from one servicer to another doesn't constitute a different mortgage 

calculate as the IRS suggests and then run through the worksheet on page 12.  Then you will know what is deductible.  

With that solved, you can enter the result in TT as one 1098; I would save your worksheet and calculations should you ever get audited

[MJC1985]

Is there a timeline to resolve the average mortgage balance issue? It is still impacting 2021 returns being filed in 2022.  I sold one home during the year (pre-2017 debt) and bought another this year, and the software is unable to do this calculation correctly, resulting in TurboTax inappropriately capping my interest deduction.   I've used TT to file for ages but will have to go somewhere else this year unless a fix is in place.

[MarilynG1]

The average balance of each loan for the year is obtained by adding the monthly average balances and dividing the total by 12. 

To do the calculations, you'll need the monthly balances for each loan.

Please read IRS Publication 936, especially the worksheet on page 12. 

You can then check this against the amounts TurboTax calculated on the Deductible Home Mortgage Interest Worksheet and make corrections directly on the worksheet if using TurboTax Desktop. 

It can be a bit tricky getting the 1098s into TurboTax correctly.   If either mortgage had a balance over $750,000 and you have limited interest, then you do want to enter them separately and let the computer calculate your limits. Otherwise, add them together and use the newest balance.

Click this link for more info on Multiple 1098s.

[cmtaxman213]

I manually adjusted box 2 on each 1098 based on the allocation of days during the year.  This worked in TT but it may cause a matching issue on the 1098s. 

[LaLaJES]

Can you do this example including where one or both are Mixed-Use loans (Home Acquisition debt

and Equity debt) and total is over the limit?

[AmyC]

See About Publication 936, Home Mortgage Interest Deduction part II on page 9.Use  page 12 to combine all loans. Only one table 1 is used for all of your loans in one place. The instructions to go through line by line are after the table. There are examples throughout to help you. Page 13 has mixed-use mortgages.

@LaLaJES

[LaLaJES]

For Line 12 total average balances of those loans, do you only use the Home Acquisition portions of the loans (and then the corresponding acquisition interest amounts for line 13), or the full mortgage amounts?  

[DaveF1006]

It depends. If you are filing a 2021 Tx return, you would only be interested in reporting the 1098, the way it is recorded and report the outstanding mortgage principle amount that is listed in Box 2 of the form.

@LaLaJES

[robNC]

Has TT fixed the problem with average mortgage balance?

I still cannot figure out how to override the incorrect result.  In my case, I sold my house on June 30 and paid off the $1.0 million mortgage.  I bought a new house on August 1 with a $600,000 mortgage.

I believe the IRS would allow a deduction equal to 75% of the interest paid to old house lender, plus all the interest paid to new house lender.  Correct?

The most obvious issue I see when going into supporting worksheets is that new house average mortgage balance is $600,000 as it doesn't pro-rate  for the 5 months outstanding.  (The old house mortgage correctly calculates its average at $500,000, although that appears to be correct only in my instance of being outstanding for exactly a half year......beginning balance $1.0 mil / ending balance zero.)

So my TT average mortgage is incorrectly calculated as the sum of the two averages, or $1.1 million.  In turn my interest deduction is limited to 68% of total interest i report from the two 1098's.

Interestingly, if the average balance on new house was calculated at $250,000 (5/12 x $600,000), the sum of the two averages would be $750,000, and TT would incorrectly not limit my interest deduction.

Isn't this a very common situation?

[DMarkM1]

Yes, your situation is common.  Since there was no overlap of your mortgage loans, your average loan balance can be figured by adding your loan balance at the beginning of the year (Form 1098 box 2 for first loan) to the loan balance on the second loan at the end of the year (easiest to find on your first statement of 2023).  Divide that total by two.   

For example if your beginning mortgage balance was $1M and the ending balance was $600K the total 1.6M / 2 = 800K.  Your loan limit it appears is 750K therefore 750K/800K = .9375.    Multiply your loan interest paid by .9375 to get the deductible portion.  Here are the steps in TurboTax to make the adjustment.  You will start by deleting the 1098 entries to start fresh.

Be advised the mortgage worksheets are not part of the forms that are filed with the IRS.  The worksheets are for your records so be sure to keep your calculations with your tax records.  

1. Deductions and Credits
2. I'll choose what I work on (If desktop)
3. Update Mortgage Interest topic
4. Delete both 1098s
5. Done
6. Update the Mortgage interest topic
7. Yes
8. Put in old loan first
9. Primary Home 
10. None of the above
11. Enter form information from old loan
12. Continue
13. No points to deduct
14. Yes Most Recent
15. Answer the Refi questions as needed
16. Continue
17. Add a lender
18. Same steps as above for the new loan
19. Continue
20. Done
21. Purchase date of first home should be same as the date in box 3 of 1098
22. Purchase date of new home should be same as date in box 3 of 1098
23. Payoff amount for old home and date of payoff
24. Loan balance on 1 Jan 2023 for new loan; leave date blank. Amount should be less than box 2 on 1098
25. Now you should see the page explaining the limitation
26. You can click the help me with this link and see that if you take your loan balance at the beginning of the year box 2 old loan and add it to the balance of new loan at end of year (loan amount 1 Jan 2023) and then divide by 2 the avg will be below 750,000.  Meaning all of your interest is deductible. 
27. In the "Your Adjustments" box enter your calculated interest deduction
28. Continue

[robNC]

thanks!  got it to work.  so basically I need to override the TT calculation by figuring it out correctly myself (step 27).

Note: using a Mac version of TT Deluxe on a newer M1 chip, the "help me" link (step 26) causes TT to crash every single time.

Another note: why isn't TT programmed to create a dialogue when it knows you have sold a house (and/or re-financed)?

Last observation: Pub 936 is why everyone hates the IRS. It is indecipherable!

[mm2023taxes]

How does this process change if there are overlaps in the two loans?

For example, my original mortgage form Home 1 was from 2016 for $250K.  As of 1/1/2022, the loan balance was $175K.  Home 1 was sold on 8/15/2022, with the final loan balance of $165K at closing.

I bought Home 2 on 5/15/2022 with a mortgage amount of $770K.  The loan balance for Home 2 on 12/31/2022 was $760K.

So there are 3 months of overlap with the two mortgages, but neither was in place for the full year so the default calculation in TT feels too punitive.

Can I still use the same process as the above response when the loans did not overlap or are there are additional steps/calculations that have to be followed in this situation?