How to set Average Balance of Debt for loan acquired between 1987 and 2017

[GeorgeTheTaxinator]

In 2012, I got a mortgage for $1,000,000. In 2018, I refinanced it with cash out for investments. My view is that because I had paid down the mortgage, the average balance of my debts between October 13th, 1987, and December 16th, 2017, is about $910k.

I am trying to establish this in the Deductible Home Mortgage Interest Worksheet. On Part 2, Qualified Loan Limit, line 2 requests my average balance during this time period. I believe I should put $910k there.

But does anyone know how to walk the TurboTax UI to have a spot to write $910k?

[KrisD15]

TurboTax does not do the Home Mortgage Interest Deduction based on the average home debt balance, but if you can make the calculation, TurboTax does give you the option to enter the amount of interest you can claim.

[zomboo]

I'm curious as to why you are not going through the normal process of entering your mortgage 1098. You need to separate the amount of proceeds from the refinance used for investments (equity debt) from the home acquisition part. The average balance that goes on line 2 of that worksheet will be the average balance of the acquisition part of your mortgage in 2023. Your mortgage premiums are applied to your equity debt first. Turbo Tax will figure this out for you if you go through the mortgage interest deduction process.

[GeorgeTheTaxinator]

@zomboo 

My 1098 says my mortgage balance is $1,409,042, and the mortgage originated in December 2020. This is because it's a second refinance to take advantage of the lower rates at that time. The balance from my original cash-out refinance in September 2018 was $906,006.

I think I have a few options:

1. Check the box "The interest amount I entered is different than what's on my 1098", adjust the $36,575 there from my 1098 down to the proportional amount of interest from $906k vs. the original September 2018 balance of  $1,526,000. Then I will also have to say the loan origination date was November 2012, which is not what's on the 1098.
2. Just take the $750k limit. If you think about the math from #1, that makes my effective mortgage cap $836k, which is higher than $750k. It would be nice to have $836k. But, if there's no clean way to do it, maybe it's not worth it.
3. Go for the $1M limit. Perhaps I can morally rationalize that I did spend $450k remodeling the property after I bought it, but before I refinanced it, so the $620k cash-out in many ways just went to pay myself back for improving the property. At least enough of it to justify keeping the $1M limit. All I have to do to get this is to say the proceeds of the refinance went towards improving the property.

In a perfect world I'd be able to fill in the Schedule A Deductible Home Mortgage Interest Worksheet myself, specifically the "Average amount of debt acquired after October 13, 1987 and before December 16, 2017" (Line 2), and put in $836k. But instead it seems like I have a collection of bad options.

[GeorgeTheTaxinator]

Looking at how I handled this historically:

• 2019: The worksheet was less explicit about when the actual mortgage originated, so I took the $1M limit
• 2020: I hired an accountant who only took the $750k limit. It was COVID.
• 2021: I took the $1M limit with Turbotax by morally rationalizing that I did the $450k remodel
• 2022: I had a huge refund coming, got lazy, only did $750k. Felt pretty guilty about it. Promised myself I would figure out how to do it correctly this year.

[zomboo]

Enter your 1098 as you received it. After you select Done you get more questions:

When asked when did you buy this hose from your lender? 12/01/2012

When asked Did the original purchase date occur prior to 2017 and no cash-outs? NO

When asked How much of this loan was used to buy or improve the home? $1,000,000

With these entries I got an interest deduction of $20,320 and the option to enter my own value if I disagree.

This interest deduction is based on the $750,000 limit that Turbo Tax applies to the entire balance when you have a cash out refinance after 12/15/2017. Pub 936 does not specify that refinanced pre-2017 acquisition debt becomes post-2017 acquisition debt. Since $906,006 is the amount of refinanced pre-2017 acquisition debt, you can calculate your deductible interest as $906,006/($1,409,042 assuming this is your average balance)  = 64.3% of $36,575 = $23,551. You can put $906,006 on lines 2 & 11 and $1,409,042 on line 12.