I have a loan on my primary home that i acquired in 2015 <500k , i bought another home at end of 2018 with a balance of $1.1 mill, how to calc adj amount from 1098

[bvikasgupta]

the first home was converted from primary to rental property at the same time when i purchased this home, i received 2 1098's and wondering how to calculate adjusted mortgage interest given that this loan was 1.1mill (although only for 2 months in 2018) 

the other home(<500k) was primary for 10 months

[KrisD]

If you held a .5 mill loan for 10 months, and a 1.1mill loan for 2 months, you had an average debt of .6 mill. or $600,000.

(10 x .5) + (2 x 1.1 ) = 7.2 /12 = .6.

Unless you are filing Married Filing Separately, you would claim

10 months of interest on the first loan and 2 months of interest on the second loan. 

Once the first home was turned into a rental, the interest would become an expense for the rental. 

If you carry more than 750,000 on the second but now primary home next year, the interest may be limited since there will be a larger debt average for the full 12 months. 

[bvikasgupta]

Thank you this is helpful, but i think i found a bug in turbotax, after doing what you mentioned above and transmitting my return my fed & ca returns were rejected as there were some form updates done on turbotax on 28th, so i downloaded that and went through the process again and now it wont even "Efile" my california returns.

The reason is that ,  lets say i had  15,000 as mortgage interest reported in deductions and credit section of turbotax , out of which 4,000 shows up with my primary mortgage lender that i stayed for 2 months in the year and since the other home became rental 11,000 was the portion of time when i lived there as my primary home(but that doesn't show up as lender and flows automatically to calculate the 15k =11k+4k)

So on the "Miscellaneous Itemized deduction statement", its asking me to enter -11k(mortgage interest adjustment) when it should be 0 because turbotax is thinking that i had only one lender whereas i had two.

Due to this i am unable to E-file my state return as it says there is an error , can you please help?

[KrisD]

How did you enter the two 1098's?

[KrisD]

I think you should enter the older one first, claim 10 months of interest (11,000?)  and then enter the newer one.

[KrisD]

CA does not limit the interest, so is the -11,000 really mean CA wants to subtract 11,000 more from your income?

[KrisD]

I'll have to work a mock return up to mirror your particular situation .

[bvikasgupta]

Well the problem is because it converted to rental in 2018 it has to be entered in "Income"section where i chose days rented at fair price as 58 days and Personal use as 307, so when i go to forms mode and open Schedule E there is a section called Schedule A Smart Worksheet where my qualified mortgage interest from the rental property is 11k and Real estate taxes is 6.5k(it says reported on Schedule A)

Now when i go back to Step by Step instructions and go to Deductions and look at the "mortgage interest" deduction it shows 15k  and when i click update it only has 1 lender, i dont think i should enter the second lender again because i will end up taking the deduction on mortgage interest for my rental property the second time and that 15k will become 15k + 13k(includes full year without breakdown of rental vs residential).

I am unable to take screenshots and send it to you but will be glad to hop on a call or so?

thanks
Vikas

[KrisD]

Hello Vikas,
I spoke with people smarting than me !! and the advice I got was
1) the interest seems to have been calculated properly on the federal return
2) you are correct, do not enter the Lender (1098) again
3) the CA return was more than likely rejected ONLY because the Federal was
4) the 28th update might have "jarred" a calculation.

Please walk through, Step-By-Step from the beginning, the CA return once more. If necessary, delete the State return and re enter it . There should be no need to make any adjustment for the mortgage interest.

We believe the state reject was the result of a series of misfortunate events.
Below is the link you might need if you must clear the state return and start over:

<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/replies/3450510">https://ttlc.intuit.com/replies/3450510</a>

[bvikasgupta]

thanks, i followed the steps to clear my state return and repeated the process but i am stuck again at the same place and turbotax wont allow me to E-File with the same error pertaining to the "California miscellaneous deductions worksheet", this is really frustrating, i have already paid for my CA efile returns as well :(

[KrisD]

What is the adjustment you think it wants you to make? CA should allow the full 15,000. So do you think the issue is the name of the second Lender on the CA return?

[KrisD]

When you say  "Miscellaneous Itemized deduction statement" are you referring to CA or Federal?

[bvikasgupta]

-11k is the adjustment it wants me to make which will increase my tax liability to state of california by 1k, i think the problem is it doesn't see the name of the second lender flowing from Fed to CA and its unable to recognize the 11k extra mortgage deduction that pertains to the personal portion of my rental property when it was my primary home, so its telling me to make a deduction of -11k which negates that other mortgage deduction and increased my tax liability by 1k, does this help clarify, seems like you cant get on a phone call with me?

[bvikasgupta]

i meant CA, i have already filed by Fed return and it has been accepted

[KrisD]

We don''t work phones here, but I can give you that info. Meantime, do you see lines 8a and 8b on the CA 540 ?