We have what I suspect is a very common tax situation, but I can't seem to get TurboTax to handle it properly.
Married filing jointly, for the first half of the year lived in a primary residence with a mortgage balance under the deduction limits ($670K). At the end of June, we sold our house and bought a new home, with a mortgage balance slightly over the new limits ($780K). Total interest paid on the two loans was about $22K.
When we enter the new and old 1098s, TurboTax seems to treat us as if we had an average $1.45 million mortgage balance for the entire year and limits the deduction to about half of what we paid. Although neither TurboTax nor IRS publication 936 seem to directly discuss what should happen when you move, I get a slightly different result: using the interest divided by lowest rate method (IRS pub 936, page 13), I get an average mortgage balance of about $770K, meaning that once I plug those numbers into the IRS worksheet, about $21K out of the $22K we paid in interest is deductible.
I have two questions for the group:
(1) Am I applying the average mortgage balance calculation correctly? I note that under another of the tests that the IRS uses, the first/last balance test, our average would be even lower, but I suspect this test may not be the correct one to use in a year in which you moved.
(2) If these calculations are correct, how do I translate it to Turbotax? Should I just create a fictitious 1098 with the total interest payments plus the calculated balance, similar to what has been suggested for users who refinanced? If I do this will this create issues later in the program?
It is okay to use your calculated amounts as the Outstanding Mortgage Principal. However, you do not want to combine two loans for two different houses on the same form. You can use the interest rate method to determine the Outstanding Mortgage Principal for each Form 1098. Take the interest paid from box 1 and divide it by the lowest rate for each loan then report that amount as the Box 2 Outstanding Mortgage Principal.
You may also the monthly balance for each loan to provide the average for the year. For months where the loan did not exist, it would be 0. For example, if you acquired your new home in June, your balance would be $0 for January through May and approximately $780,000 for June through December for an average outstanding balance of $455,000.
If you use an outstanding mortgage balance different than what is reported, you do not have to worry because it is not the Form 1098 that is reported to the IRS, but rather the total deductible interest. However, you do want to keep the calculation to determine your average balance with your tax records so you can justify the number if needed.
Same Boat @jsheahan10 . It feels odd to submit 1098s with TT Box 2 numbers that don't match my paper copies, but I am relying on Rafi's expertise! The last paragraph that @RaifH writes - IRS doesn't see the balance but just the interest - gives me peace of mind that this will be OK.
(I had a 400k loan for the first 8 months of the 2021 (Sold in August) and bought a new house in June w/ a 800k loan for the last 7 months of the year...TT calculating a 1.2M loan and I was only getting 60% of the mortgage interest deducted. When you average it all out, my total outstanding mortgage principal is ~620k, so this method I can deduct 100% of mortgage insurance.