Deductible home Mortgage Worksheet and allowable limits

[Chippydoow]

I have three 1098's, One home I sold in February of 2023, one I purchased in January of 2023, and one I purchased in August 2023.   The Worksheet is limiting my deduction because the Average Balances are not calculating properly it seems?   Beginning balance + Ending Balance divided by 2 is not happening?   It is showing average balances as almost the full amounts on even the home purchased in August of 23 and reducing my deduction by 4796.00 when the loan paid off in Feb has a total interest of only 2633.00.  Makes no sense to lose 5K in interest over a loan we had for 2 mos only?  Even after I tried to manually adjust the worksheet, it did not correct the allowed interest deduction?  

Loan paid off in feb of 2023 was 478K - 2633 in interest.

Loan originated in Jan 23 is 388K - 19,179.21 in interest.

Loan Originated in Aug 23 is 300K  - 6811. in interest.

System is set to only 19,179.21 allowed????  

[zomboo]

Are you saying the total deductible interest shown on schedule A line 8a is exactly the interest you paid on the loan originated in Jan 23, $19,179.21? I did a quick run of your numbers and ended up with $18,405 in deductible interest. 

[RobertB4444]

Change the balance on the loan for the one that you paid off in February to zero.  The loan is paid off and that balance is correct.  If you are limited by the other two that is different but the one that you paid off shouldn't effect your limitations.

@Chippydoow 

[Chippydoow]

Thank you, I tried having the ending balance zero, but it still averaged it at half and limited my deductions. Instead I used the IRS instructions and used the interest paid divided by the interest rate method.  This worked to allow all my interest to be deducted.  I am not sure why Turbo Tax does not have this method included for use as an option?  I am not sure how to put notes in Turbo Tax in case of future questions or as backup though?  

[zomboo]

Be careful. The interest paid divided by the interest rate method only applies to mortgages held at all times throughout 2023.

[Chippydoow]

Thank you for your response.  I decided to use the alternative method from the IRS publication for determining the average balances.  *Interest paid for the year, divided by Interest rate, and adding all three loans together, this came out to only 549,179.00 and was well below the 750K limit.  I am not sure why TurboTax doesn't have the method available as an option when it seems to be more accurate?  I only had over 750k in loans for 1 month out of the entire year, and the limit was causing me to lose out in over 9500.00 of interest paid -which made no sense to me?  I would rather not claim the $2634.00 in interest at all from the loan I paid off, than lose out on all the other interest I had paid.  Seems like something that needs fixed in the programing?   I am not sure why TurboTax doesn't give you the option to use the Interest Paid divided by intereset rate method? 

[Chippydoow]

Please advise where it states that.  The IRS publication does not indicate that information?  

[zomboo]

Pub 936 p.12: Interest paid divided by interest rate method. You can use this method if at all times in 2023 the mortgage was secured by your qualified home and the interest was paid at least monthly.

However, it turns out you do have the option to omit the mortgage on the home you sold. See Pub 936 p.4: Choice to treat the debt as not secured by your home. You can choose to treat any debt secured by your qualified home as not secured by the home. This treatment  begins with the tax year for which you make the choice and continues for all later tax years. You can revoke your choice only with the consent of the IRS.
You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest.

[Chippydoow]

Thank you for your response.   When using a excel spreadsheet and calculating average balance for all loans I only get 592K.  It seems the IRS rules as your stating them, are designed to reduce my deduction, rather than be accurate?  I feel sorry for people with adjustable mortgages too, as they want you to use the lowest rate for averaging rather than using and adjusting the rates for each month.   

These publications need more examples and clarification as I did not interpret this statement the same way you did as my short loan was secured at all times and was paid monthly until it was paid off.  They should be clear if it is a requirement the loan be for the entire year and no partial years are allowed to be calculated?  

  Interest paid divided by interest rate method. You can use this method if at all times in 2023 the mortgage was secured by your qualified home and the interest was paid at least monthly.

Thank you for your help, I appreciate it! 

[zomboo · Accepted solution]

There is a consensus based on conclusions made in IRS memorandum 201201017 (2012) that allows tax payers to use any reasonable method to determine the amount of deductible interest.

In my opinion, a reasonable way when a main home is sold and a new main home is purchased in the same year is to amortize the average balance over 12 months. Pick one of your purchased homes as your new main home. For the sold main home and new main home loan total up monthly balances for Jan through Dec, with 0 for the months the loan was not held. Also zero out the balance and interest for one of these homes in the months the loans overlap. Total up the balances and divide by 12. This is a reasonable average balance for your 'main home' during the year. Add this to the average balance of your other purchased home, your 'second home' during the year.

However, since your sold home was only held for the first two month of the year, it would be simpler to just declare the home as not secured in Turbo Tax. Should get the same result.

Note: You can use the interest paid divided by the interest rate when the mortgage is held for less than 12 months if you divide the result by the percentage of months it was held.