If there is a refi and there was an outstanding mortgage principal listed in both of them on Line 2 on the 1098. When you do put an outstanding balance in both forms, then the program adds them together and if that number is greater than $750k, then it puts you in the category to "limit interest". To get that to go away, you need to go back to the deductions section and click on "edit" mortgage interest statement. Change the line 2 of the mortgage that you no longer owe on (like the one that you refinanced and paid off) to a 0 (zero) because you have refinanced out of that loan and no longer have an "outstanding mortgage principal". Once you change one of them to zero (the one that was paid off by the refinance) then it should no longer pop up with that error at the end when you go to file.
Unfortunately, TurboTax is not letting me enter zero for the outstanding mortgage principal. I get an error message that reads "Outstanding mortgage principal must have a value." If the loan is paid off, it no longer has a value - so why can't I enter that? How do I get around this issue so my deduction is not limited? (I'm using TT Home and Business, by the way.)
It sounds like you are running into a Turbotax bug faced by many people, it is combining the mortgage amounts and incorrectly determining that you have exceeded the $750,000 loan maximum for the mortgage interest rate deduction and reducing your deduction accordingly. So for example if you have a $600K home loan that you refinanced in 2020, TurboTax will downscale your deduction assuming you have a $1200K loan (over the limit.)
There is a Turbotax page that tells you to combine the amounts in your various 1098's and enter them as a single 1098, but I don't feel comfortable doing that as the IRS receives all the 1098's from your lenders which means your return would have different information. Here is that page:
BY FAR the best solution I have found is right here (a post by RecoveringEngineer):
You can manually adjust your average loan balance in the mortgage interest worksheet (which is not a part of your actual tax return), and your mortgage interest deductions will be calculated correctly in TurboTax and in your return.
Here is the workaround:
If you have more than one 1098 form, I will recommend you to combine all 1098 forms and enter as one. I am attaching a TurboTax link for the instructions how to do claim your mortgage interests. Click here:
For tax years prior to 2018, your mortgage interest deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status). Beginning in 2018, this limit is lowered to $750,000. For more information about the mortgage interest deductions, click here: Mortgage Interest deduction
**Mark the post that answers your question by clicking on "Mark as Best Answer"