I purchased a primary residence in 2023, so owned and lived in it for all of 2024.
Simplified numbers below:
The principal balance in January 2024 was $1.5M.
I made a large payment towards principal in February 2024, bringing the principal balance down to $1.0M.
The 1098 from my lender only lists the initial principal balance of $1.5M, as well as the interest paid.
Thus, TurboTax assumes that only half of the interest I paid is deductible (because of the $750k limit).
However, because of the principal payment early in the year, the average monthly principal balance was just above $1M. So I should actually be able to deduct slightly less than 75% of the interest I paid. This is all according to my understanding of the "Statements provided by your lender" section of Publication 936.
On to my question:
How am I supposed to enter this in TurboTax?
I can override the "Outstanding Mortgage Principal" box for the 1098 in TurboTax, but then it will not match the value provided by the lender.
However, I see no other way to enter an alternate method for computing the Average Monthly Balance.
How am I supposed to enter this?
You can change the amount for outstanding mortgage balance. Since the 1098 instructions ask lenders to report beginning of year mortgage balance, but the tax return limits based on average, it is acceptable to adjust this figure, and doing so will not cause any errors.
Make sure you are using an allowed method to compute the average balance. It sounds like you had the same mortgage servicer all year, so you can use the interest rate method. To figure this, take the total interest paid in 2024 divided by interest rate.