Try this. Delete all the mortgage Forms 1098 and continue through to "Wrap up tax breaks". Then enter the Form 1098 for the sold property first. Be sure to answer the question about the mortgage being "paid off".
Next enter the new home Form 1098. Continue through to "Wrap up tax breaks". You will come to the page showing whether "Standard" or "Itemized" is best for you.
Just below the bar graph there is a breakdown of the itemized deductions. Click that hyperlink and verify that your mortgage interest is not limited.
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I am having the exact problem on a refinance. I have followed the recommendations of other users about sequencing the 1098’s and indicating that the first loan is paid off, to no avail. The only thing that worked close to the way it should work (total principal is the higher of the new and paid off loans) was to enter 0 for the principal of the lower (paid off, in my case) loan in box 2 of that 1098. I know this entry is incorrect, but it back-engineers an answer that’s approximately correct. I really hope TurboTax fixes this bug. I have not been able to find a location on the website to provide this feedback, so hopefully someone at TurboTax is monitoring these questions.
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.