HELOC Interest is not correctly determined for the case where the loan is not used only to buy, build, improve the loan securing property.

[ksunberg]

This seems like a problem that would have been discovered by others by now but alas, I could not find any pertinent posts.

I have no mortgage per se on my primary residence but I have a HELOC secured by my primary residence that I use from time to time as a cash flow solution. The TurboTax "Learn More" guidance rightly/correctly explains that “You can now only deduct the interest from the amount of your loan that was used to buy, build, or improve the home that it's secured by meaning it acts as collateral for the loan to protect the lender.”  In 2023 the outstanding principle/balance on this loan was $0 the entire year except for a 3 day period when I used it to buy a truck.  The $59 interest expense was duly reported on a 1098.  The allowable interest deduction in this case is $0 so I can avoid the impact of the subject problem by simply not making the entry in TurboTax in the first place. That said, this seemed like an issue that should be reported for the general good.

In the TurboTax dialog...

• Q: Is this loan a home equity line of credit (HELOC) or a refinance of a previous loan?
  A: This loan is a home equity line of credit (HELOC).
• Q: Have you used the money from this loan exclusively on this home?
  A: No, I used some or all of this loan on a different home or on something other than a home.

For the purpose of determining the deductible amount, TurboTax gives me the "Help me figure this out." or "I'll enter it myself." options.

• The "Help me figure this out." path asked ...
  Q: Since you first took out this loan, how much has been spent to buy, improve, or build the home it's secured by? A: $0 (When I experimented with a non-zero amount there was no follow-up question to collect info needed to determine the deductible/non-deductible split.)
  Q: What was the balance of your mortgage loan on December 31, 2023? A: $0
  Q: This loan was paid off during 2023? A: I tried both yes and no.
• The "I'll enter it myself." path asked...
  Q: What was the balance of your mortgage loan on December 31, 2023? A: $0
  ... It never asked for my determination of the deductible portion of the interest.

No matter what path I followed the end result was that the full $59 interest amount was incorrectly carried over to Schedule A.

Also, using the Forms View I found the following curiosities recorded in the Mortgage Interest Worksheet ...

• Q: Was this loan the result of refinancing a previous loan? A: Yes
• The full $59 interest amount appeared to be classified as Acquisition Interest.

This appears to be a bug in TurboTax.

[zomboo]

I am curious to learn what other value is shown in Box 2 on your 1098. I experimented with entering $59 mortgage interest in Box 1 and $0 outstanding mortgage principle in Box 2 and got the results you did. But when I entered $3000 as the amount borrowed for the truck in Box 2, Turbo Tax correctly treated the $59 as non-acquisition interest.

[ksunberg]

Box 2 in the 1098 correctly reports $0.

[zomboo]

You are correct that the lender is required to enter the amount of outstanding principal on the mortgage as of January 1 of the current year or the Origination Date if originated in the current year in 1098 Box 2.  However, you paid $59 in interest but you are reporting an initial balance of $0 and an ending balance of $0 which begs the question: What did you spend $59 in interest on? You should enter the amount of your first draft on the HELOC in 2023 that created an initial outstanding balance.

[ksunberg]

I disagree.

In simple cases like mine the best workaround is to simply not enter this 1098 information at all.  In a more complex HELOC situation where there's actually a split between deductible/non-deductible interest, I'm guessing that you'd have to fudge the Box 1 (and others?) input as well.  At any rate, I would say that, in general, fudging/misrepresenting input data to cause a program to yield the output I hope for, is not a great idea, especially in the context of a tax preparation program.

I expect better from a mainstream program like TurboTax.  If the TurboTax program needs information/data other than what's correctly reported on the 1098 it should explicitly request that input from the user.  More specifically, for the HELOC case...

• The "I'll enter it myself." path should reference the calculation prescription in Publication 936 and then prompt the user to enter the result.  This seems like an easy program update to me.
• The "Help me figure this out." path should prompt the user for the input information needed to complete the calculation prescription in Publication 936 and then complete the calculation.  If this program update can not be done in a timely fashion then remove this path option.

[zomboo]

I agree with your comments on how Turbo Tax should handle these situations and your reluctance to entering data different from that reported on the 1098. I went into my desktop version of Turbo Tax and traced your steps and entered $59 in Box 1 and $0 in Box 2 of the 1098. I entered $0 when asked for the balance on Dec 31,2023. After selecting the Loan Was Paid Off In 2023 box, I was asked to change the $0 balance entered for Dec 31, 2023 to the balance on the payoff date. I entered $3,000. This worked without making changes to the 1098.

I know you said you have tried this already but if you want to try it again, start with a clean slate by deleting the HELOC mortgage entry that you have been trying different scenarios on and re-entering from scratch.

[ksunberg]

I tried the technique you suggested, including starting from scratch and freshly entering the 1098 data.  $59 was still carried over to Schedule A.

In your test case did the Mortgage Interest Worksheet incorrectly show that this loan is/was "... the result of refinancing a previous loan?"

This failure is not the least bit subtle.  It's as if the case of "No, I used some or all of this loan on a different home or on something other than a home." was never subjected to even the most simple testing.

Do the TurboTax developers monitor community content?

[zomboo]

This is making me nuts! I went back and went through the steps I said worked and got the same nonsense you did. The mortgage worksheet always has the 'Is this a refinance of a previous loan' box checked no matter how many times I go back and check the HELOC box. Turbo Tax is not asking the right questions for a HELOC, especially one that starts off with a $0 balance and has a draw and payoff ending with a $0 balance.

My advice is to first check with the finance company that issued the 1098 and ask them about the entry in Box 2. Maybe they will issue a corrected 1098 with a value other than $0. If not, my advice is to go back to my original suggestion. When entering the 1098 for your HELOC, enter a value in Box 2 for the Outstanding Balance. This could be the amount of your initial draw or the total of draws made in 2023. You won't have to say the loan was paid off in 2023 and all of your interest will be treated as non-acquisition interest and not show up on Schedule A. Note if your state is like mine, California, you will get a $59 non-acquisition interest deduction. This is the most realistic and honest way to handle this.

[ksunberg]

For me, the benefit of deducting $59 interest is negligible and hence not worth much additional effort.

Considering the complexity of the Publication 936 specification for determining the deductible interest, it is obvious to me that, for all but the most trivial scenarios (e.g. mine), it is not possible for a single value in Box 2 ("fudged" or otherwise) to effect a correct result.

When I get some free time I plan to *call* TurboTax support and ask them to open a problem ticket.

FYI I see that there is at least one other community thread that is driven by this same deficiency.