Home Loan Interest - Large Lump Sum Payment made in January

[ejmigski]

We had a loan with a principal balance of ~1,270,000. In January we applied a 500,000 payment, thus reducing amount down to 760000 after selling our prior home. My 1098 only has two numbers, the original amount of 1,270,000 along with the interest paid of 44,000. Turbo tax seems to scale the deduction based on 750000 / 1270000 which of course is incorrect since the loan was only that high for January. I went ahead and calculated the percent of interest that would be applicable for each month - (interest paid * (750000 / principal balance))  when principal was over 750k.  I then summed the 'scaled' interest amount for the year and put that amount in turbo tax along with the principal amount of 750000 so it applied the calculated interest amount. I also added a comment into the form since i flagged my amount differed than what was provided to me. Is this logic valid or do i have to use the original loan amount on January 1st for every month?

[zomboo · Accepted solution]

You should enter your 1098 data exactly as shown on the form. When you are done entering your deductions, you should get the 'Your deduction is being limited' screen. This is where Turbo Tax will display the amount of deductible interest it calculated and give you the option to enter your value.

You should be using the 'Statements provided by your lender' method on page 12 of Pub 936. Using the numbers from your spreadsheet: Add up the ending balances from your statement and divide by 12 to get the average balance (9,980,000/12 = 831,667). Apply the limit to the average (750,000/831,667 = 90.2%). Total deductible interest = 46,700 * 90.2% = 42,123. Your method of calculation is not supported by Pub 936 but you are arriving at essentially the same result. 

From your spreadsheet, it looks like you are using the starting balance for each month. For the 'Statements provided by your lender' average, you have to use the ending balance. Shift your monthly balances up one month, dropping the Dec 2023 balance and interest and adding Dec 2024 balance and interest. The will have little effect on the result.

[ejmigski]

Thank you so much for taking the time to reply and clarifying these steps for me. Greatly appreciated!