Confusion over interest deduction after refinancing

[jeffreydlewis]

Hi -

I am confused about how TT is handling the interest deduction calculation following refinancing.

I refinanced a (pre-Dec 2017) mortgage in October 2020 with the same lender.

• The old mortgage was about $880k so not subject to interest deduction reduction (because pre-2017).  The new mortgage is also about $879k but now subject to reduction.
• Interest paid on the 1st loan was about $22k, on the 2nd, around $4k, for a total of $26k.
• TurboTax adds up both of the "outstanding mortgage principal" amounts  (from the old and new mortgates) to use to calculate the percent of interest that is deductible - it then takes the fraction $879k / ($880k + 879k) = 0.5 and applies it to the $26k in total deductions to give me a reduced $13k deduction

This can't be right -- presumably right calculation should be based on the average of the two amounts (or better yet, no limit on the 1st mortgage interest (since pre-Dec 2017) and reduction on the second.

What is wrong here?

An earlier suggestion on a similar question said to remove the entry in Box 2 from the 1st mortgage 1099, but TT doesn't want to let this happen.

Thanks for any help!

[AmeliesUncle]

As you have found, this is an error in the program that has not been fixed (and it seems questionable if they are planning on fixing it or not).

If you did NOT take extra money out, then I think the work-around is to just enter it as ONE 1098, and just manually combine the amounts of interest.

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@jeffreydlewis wrote:

• The old mortgage was about $880k so not subject to interest deduction reduction (because pre-2017).  The new mortgage is also about $879k but now subject to reduction.

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No, unless you took out money, there is no reduction.  The refinance still follows the pre-2017 rules.

[Cynthiad66]

@jeffreydlewis

Please try this workaround

If there is a refi and there was an outstanding mortgage principal listed in both of them on Line 2 on the 1098. When you do put an outstanding balance in both forms, then the program adds them together and if that number is greater than $750k, then it puts you in the category to "limit interest". To get that to go away, you need to go back to the deductions section and click on "edit" mortgage interest statement. Change the line 2 of the mortgage that you no longer owe on (like the one that you refinanced and paid off) to a 0 (zero) because you have refinanced out of that loan and no longer have an "outstanding mortgage principal". Once you change one of them to zero (the one that was paid off by the refinance) then it should no longer pop up with that error at the end when you go to file. 

[jeffreydlewis]

Thanks to both for the replies

The setting to zero work around works, at least partially

The mortgage balance on the 1st mortgage "goes away" and on the new (2nd) mortgage, it calculates the allowed ratio as (750k/880k) = 0.85 and then applies it to the total interest paid, reducing the deduction from $26k to $22k (rather than $13k as originally)

My (remaining) problem is that this is applying the 85% factor to ALL my interest payments from both mortgages -- I would think that ALL of the interest from my 1st mortgage should be deductible, and the 85% should apply only to the interest from the refi 2nd mortgage which is subject to the 85% factor.

Does this make sense?  I can figure out the calculation and put it in with an OVERRIDE, just want to make sure it makes sense

Thanks again