help with mortgage interest limit

[ineedhelp2021]

hi

i need help to understand the average mortgage balance calculation. the 1mil/750000 cap is easy to understand but not how to calculate the average (or im not understanding).

We moved twice last year, selling first our property in VA in april and then our FL house in November and moving inbetween to our current home. mortgage balanced was as follows :

	jan	feb	mar	april	may	jun	jul	aug	sep	oct	nov	dec
house 1. sold april15th	329000	328000	327000	326000
house 2. sold nov 15th	303000	302500	302000	301500	301000	300500	300000	299500	299000	298500	298000
house 3. bought sep 1st									510000	509124	508247	507367

when entering my 1098s with TT it tells me to take standard deduction despite my interest > 18000$ and capped at the 10000$ state taxes....  what it looks like its doing it adding up the loan balance to > 1.13mil and reducing effect of the interest to ~ 65% making standard deduction better but is this really right?.

pub 936 got me more confused honestly...  

if i do the math by hand i get an average of 554 but am i doing it right? below how i sum up the monthly balances and average it out :

	jan	feb	mar	april	may	jun	jul	aug	sep	oct	nov	dec
house 1. sold april15th	329000	328000	327000	326000
house 2. sold nov 15th	303000	302500	302000	301500	301000	300500	300000	299500	299000	298500	298000
house 3. bought sep 1st									510000	509124	508247	507367
balance	jan	feb	mar	april	may	jun	jul	aug	sep	oct	nov	dec		avg
balance sum	632000	630500	629000	627500	301000	300500	300000	299500	809000	807624	806247	507367		554186.5

so i get average of 554186.5 and think i should be able to deduct the full mortgage interest.
am i wrong, or is TT doing the math wrong for me?

[NCperson · Accepted solution]

see if this post helps....someone else had a similar question earlier tonight 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/re-deductible-home-mortgage-inte...

your 12 point average is the way to go.... i try to explain the Mr. Blue example in pub  536......

just take the interest on each mortgage and divide back by its respective interest rate... do not adjust for the number of months the mortgage was outstanding.  THAT is the balance you use as the 'average balance' for each loan - you should get a result that is very similar to how you laid out the 12 point average 

[ineedhelp2021]

thank you, this made me understand it, now i just have to figure out how to get TT to accept this. it looks like i need to zero out box 2 for each of the 1098's where the loan has been paid off for it to calculate correctly....

[seattlelostpack]

@turbotax - how do we do the 'Interest Paid Divided by Interest Rate Method' from IRS Pub 936 in Turbotax?

https://www.irs.gov/publications/p936#en_US_2021_publink[phone number removed]

[RaifH]

You can use the interest rate method by calculating the Outstanding Mortgage Principal by dividing the interest paid / the lowest interest rate on that home. Take that amount and replace the amount reported in Box 2 as the Outstanding Mortgage Principal.

To use the interest rate method, you must have owned the home all year long and you paid monthly. 

The average monthly balance that @ineedhelp2021 calculated above for their situation is applicable to all situations and is the one that should be used if you did not own the home for the entire year. 

Rather than sum the totals, you should calculate the average outstanding mortgage principal for each loan and report that in Box 2 of their respective 1098s. Using the example above, report house 1s Box 2 amount as $109,167 and so on for the other 2 houses. Report the rest of the information as it is reported on Form 1098. If this brings your total mortgage principal below $750,000 then your mortgage interest should not be reduced. 

@seattlelostpack

[seattlelostpack]

Hi @RaifH - thanks for tagging me and providing this answer. Can you help w/ this hypothetical situation?

Lets say that I purchased a home on June 30 (800k loan - Home #2) and sold my existing home on 4 August (500k loan- Home #1). Without getting into details, both of these homes qualify for interest deduction.

Is it acceptable to calculate my 'June' field for Home #2 as 800000 * (1/30) = 26.6k? I.e my June would be 16.6k, but July-Dec would be 800k.

Similarly for Home #1 - My August field would be 800k * (4/30) = 106.6k; and Jan-July  would be 500k; since I only owned Home #1 for 4 days in August.

I ask this because If i include the full value for those two months, I'm slightly over 750k limit, but if I use 'partial month values', then I'm well under 750k limit. THanks for your help!

[RaifH]

The IRS only lists three acceptable methods of determining your mortgage principal in most circumstances: the average of first and last months, the interest rate method, or the average of the monthly statements provided by your lender. While your method of using an average daily balance seems perfectly reasonable to me, it is not specifically included as one of the IRS's acceptable methods.

Since you are so close to the cusp, you can check your lender's statements for the month of purchase and the month of sale to see if they report using the average daily balance.

@seattlelostpack

[seattlelostpack]

@RaifH - Thank you so much for this help.

Question - I have already filed my taxes. (Accepted by IRS, but have not received refund) I think my principal is likely 756k now that I've reread the pub w/ your input. Would you be able to outline the steps I need to take to adjust my tax return - for this particular form? I imagine <$100 of my mortgage interest doesn't count at 756k, but I would still want to have the proper paperwork. Thank you!

[RaifH]

I would not do anything until you receive your refund. You have up to three years after the original due date to file an amended return, so plenty of time. 

I'm not sure what your original filing contained, but you are able to amend Form 1098 within TurboTax:

1. Sign in to TurboTax
2. On your Tax Home, scroll down to Your tax returns & documents, select 2021, then Amend (change) your return
3. Select Amend using TurboTax Online
4. On the screen OK, let's get a kickstart on your 2021 amended return, select Changing other info on my return and Continue
5. Answer the questions on the following screens. The Refund Monitor will reset to $0—don’t worry, this is normal for amended tax returns
6. When you reach Here's the info for your amended federal return, select Start next to Mortgage Interest and Refinancing (Form 1098)
7. You can enter your calculated amount for the Outstanding mortgage principal reported in Box 2. Your federal (and possibly state) refund should adjust if the change in principal impacts your taxes
8. Continue through the screens, making the changes you need to make to amend your return

[seattlelostpack]

Hi @RaifH , Another year - another question!

I've owned one house all of 2022, but refinanced two loans in February '22 into one loan.

So Jan/Feb: had two loans totaling ~850k

March-Dec: had one loan totaling ~850k.

Lets say I paid $25k in interest across all three loans. Since the loan prices were about the same, my thoughts for the max interest I can deduct is $22058 ($25k * 750k/850k), since $750k is the max loan I can write off interest for.

My question: 1. would this method be accurate? and 2. How do I best input the 1098s to match this new value which does not align w/ turbotax's calculation? Is the recommended method to input the three 1098s as written, but then enter the $22058 value under the 'Your Adjustment' box of the 'Your mortgage interest is being limited" screen?

THank you!

[AmyC]

1. It looks like you have followed Table 1 Worksheet to Figure Your Deductible Mortgage Interest - please double check before entering.

2. Sch A only submits one mortgage interest answer to the IRS. You can skip the worksheets, enter your current mortgagor, the allowable interest and mark a balance below $750,000 to avoid the issues.

@seattlelostpack 

[vk16]

Hi @RaifH 

Thanks for the information.

I am confused when you say "To use the interest rate method, you must have owned the home all year long and you paid monthly. "

Here's the text from Pub 936 and there is NO mention of needing to own home all year long. In fact this method is more meaningful for cases when people don't have mortgage for all year long. For all year long mortgages, simple method of averaging start and end of year values works just fine.

According to me, "At all times" in the text below refers to mortgage secured by qualified home 100% of the times, not 100% of the year.

Actual text from Pub 936......

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