How can I use method 2 in p936 to calculate deductible mortgage interest in turbotax? My case is special because I paid down a lot in middle of the year.

[HelenC12]

Please clarify the page number you are referring to in IRS Publication 936, Home Mortgage Interest Deduction so we can review method 2 and be able to better understand your question.

[ty890218]

Page number 13 under title "Average Mortgage Balance".

Method 1 (Average of first and last balance method) doesn't suit my case since I didn't pay evenly. I have to use Method 2 (Interest paid divided by interest rate method).

[RaifH]

This can be done in TurboTax Desktop. To use the interest paid divided by interest rate method outlined in Publication 936:

1. In TurboTax Desktop, go to the Forms section of your return
2. Click on the Home Mortgage Interest Worksheet (Home Int Wkst)
3. Click on line 3, Outstanding Mortgage Principal, if you would like to use the interest paid divided by interest rate method you may, provided that you owned the home all 12 months and you paid monthly.
4. Click the Cross next to the entry to Add your supporting details
5. For your description, type in the formula that you are using to determine your outstanding mortgage balance. For example, 24500 interest paid / .03 interest. If your interest rate varied during the year, you must use the lowest interest rate for this method.
6. In the amount, type in the Outstanding Mortgage Principal determined by this method. In this example, that would be 816667.
7. That amount should automatically replace the original amount on Line 3 as reported on Box 2 of your 1098. 

[ty890218]

Thanks! I am using the online version right now, is it doable there?

[RaifH · Accepted solution]

No, there's no way to "show your work" in TurboTax Online. You can replace the amount in Box 2 of Form 1098 with your calculated amount using the interest rate method. You would want to maintain your records for at least three years, as you always do in case the IRS were to question how you came up with the number. If the amount using this method is still high enough that your mortgage deduction is limited, TurboTax will ask you the amount of Outstanding Mortage Principal on January 1, 2022. You will want to use the same number that you calculated again because it is going to take the average of the two numbers.

[ty890218]

That's very helpful! Actually I have two loans in year 2021.  

The first one (less than 750K) paid off at Jan on a home sold. The second one is more than 750K on home purchase. So technically I'm not holding them throughout the year. But I assume I can still use the same technique and apply to both loans, right?

[RaifH]

Yes, you don't have to have the mortgage for the entire year to use the interest rate method. Your Outstanding Mortgage Principal on the first will be much lower than what is reported since you only paid interest for one month. 

You still may have your mortgage interest deduction reduced depending on how long you held the second mortgage and how much above $750,000 it was. 

[rsg928]

thank you.. I do not see the "cross" but if I double click the number in "outstanding Principle balance" I do get to a supporting detail worksheet that allows me to explain how I get to an average mortgage balance that is correct using the interest paid/interest rate method. But in order to get the Average Balance to calculate correctly I needed to plug the original balance to a low number so the average would equal the method two approach. This only works if the mortgage was outstanding at least 6 months of the year.