How to deduct all interest for home mortgage after converting primary to rental?

[sberry192]

I have the following situation in 2021:

Converted my primary home into a rental property (Property 1)
Purchased a new home (Property 2)
Initial mortgage of new home was immediately sold to another loan servicer (Property 2)
Refinanced new loan (Property 2)

I have received 4 1098 forms and both properties were my primary home at some point in 2021. The mortgage for property 1 is ~$410k and property 2 is ~$700k. It is my understanding that I should be able to deduct 100% of the mortgage interest (minus the prorated portion of the rental property) for these properties as my primary home mortgage was < $750k at any given time.

This is a similar situation to what was asked in this thread: https://ttlc.intuit.com/community/tax-credits-deductions/discussion/2-homes-and-2-loans-one-converte...

where an employee/expert confirmed this should all be deductible, but the software is incorrectly adding the two mortgage balances together and limiting the deductions. The workaround to change the 1098 value seems like it doesn't apply here as I still have the mortgage on both properties, so marking one outstanding balance as $0 seems wrong and inviting of audits

[LeonardS]

Form 1098 is an informational form used to prepare your tax return.  The IRS does not match what is on your Form 1098 to what is reported on your tax return,  Many taxpayers who receive Form 1098 never report it on their tax returns

The mortgage interest for the property you converted to a rental will be reported on Schedule E.  You will apportion that amount of interest by adding all the interest reported against the property for the entire year and then allocate the amount that was paid after it became a rental property.  The remaining balance can be used as an itemized deduction on Schedule A

This link Publication 936 (2021), Home Mortgage Interest Deduction has information you may find helpful.

[sberry192]

Thanks @LeonardS .

To clarify, I have split the converted rental property interest among Schedule A and E already, but because I had 2 primary home's during the year, and the converted rental property mortgage was not paid off, the TT software is adding the outstanding balances $410k+$700k=$1,100k and then saying that I can only deduct $750k/$1,100k=~68% of the mortgage interest I have paid.

I confirmed that entering $0 as an outstanding mortgage balance for the converted property no longer triggers this calculation. Is this the correct way to workaround the problem in TT?

[AmyC]

Yes. The program is searching for how to do the worksheet to determine the allowed amount, If you know the correct amount and it is showing properly on your return, then the worksheet values don't matter. They are not a part of the return. Only the sch A and sch E values are going to the IRS so the worksheet and a zero will not matter.

[krichards22]

Hello! I am wondering what you ended up doing in this situation? I currently have the same problem and I'm trying to figure out the "right" way to handle it. 

I converted my primary residence into a rental and purchased another home as my new primary residence, so I have two 1098's to enter on schedule A. The total outstanding mortgage principal balances between the two properties exceeds the 750k limit. I am wondering for my schedule A, do I adjust the outstanding mortgage principal balance for the property turned rental by the % it was used for personal use? 

[sberry192]

I ended up doing what I had posted above:

"I confirmed that entering $0 as an outstanding mortgage balance for the converted property no longer triggers this calculation. Is this the correct way to workaround the problem in TT?"

All the numbers on the official forms looked correct after that.

[krichards22]

Awesome, thanks for the follow up and confirmation!