I sold a house and bought a new one. Turbo tax seems to be adding both mortgages to exceed 750K limit. How do I fix it?

[AmyC]

Let's check your entries.

Enter mortgage, primary home, enter details, yes secured, yes most recent for this loan, not a refinance or HELOC, yes exclusive to the house. 

Same entry answers for the second house. I did add that it was a new mortgage and I paid points for the new house. If you did not pay any points, it may be worth saying $1 to make sure the program knows this was a new house with a new loan. $1 spread over many years has zero dollar value.

 I entered 2 houses with values that exceed the allowed amount for one mortgage.

[zomboo]

Turbo Tax will sum the average balance of your mortgages and limit your deduction if the sum exceeds the $750K limit. However, Turbo Tax will allow you to enter a different amount of deductible interest directly without editing worksheets in the program (at least you could last year with the desktop version), which is often necessary when you sell and buy a new home in the same year. You do have to figure the amount to deduct yourself and there are different approaches you can take to get you the highest deduction amount. Please provide the months held, approximate average balance, and interest paid for each mortgage so that I or a tax expert may help you decide which way to go. 

[allan0197]

thanks for the quick feedback, below is more context which makes it more complicated due to a marriage.  

• My fiancé and I lived in primary house from 1/1 through 5/14. I was the sole owner and paid 9,146 in interest on a mortgage of 677,293. The mortgage was paid off when the house was sold. 
• My fiancé was and continues to be the sole owner of another house; she paid 6,320 on a 222,358 mortgage
• We married on 6/1
• My wife and I purchased a new primary house on 7/30.  Mortgage is 640,000 and paid we paid14,332 in interest and 9,600 in points.  While we both own the new house, she continues to be the sole owner of her house, which we consider a second home.
• We are planning to file jointly. 

[zomboo · Accepted solution]

I am going to assume that the original main home that you owned and the second home you wife owns were purchased after 12/15/2017 and that the balances on all three mortgages are good approximations of the averages. Turbo Tax will divide the $750K limit by the sum of all three average balances: $750K/$1,539,651 = 48.7%. Multiply this % by the total interest paid: $29,798 * .487 = $14,512 of deductible interest.

However, you will get a better deal if you declare the original main home that was sold as unsecured. This is allowed in Pub 936 and there is a box in Turbo Tax to uncheck to declare this option. Then divide the $750K limit by the sum of the average balances for the second home and the new main home: $750K / ($222,358 + $640,00 = $862,358) = 87.0%. Multiply this % by the total interest paid on these two homes: $20,652 * .870 = $17,967. This is called the simplified method used in Table 1 in Pub 936. Turbo Tax does it this way but may figure the averages a little different and not round off the percentage to three decimal places.

You can use the exact method instead of the simplified method but it yields less than $200 more in the deduction and you have to calculate it yourself and enter it in Turbo Tax. If you are interested in how to figure the deduction using this method, let me know.