Calculating mortgage interest deduction with two loans

[G237]

I have two mortgages. Both loans originated in 2017, so I have up to $1M for the mortgage balance to deduct interest.

First home (primary) - Entire year

beginning balance - $1904931

ending balance - $1867423

Total interest - 63714

Second Home (Personal use for 111 days of the year, then rented out from 4/23/18. I have included the rental portion of the interest in the rental calculations)

Starting balance Jan 1st 18- $385000

Ending balance on April 30th 18 - $382329

Ending balance as of Dec 31st 18 - $378509

Total Interest for the year - $16237

Prorated interested for 111 days - $4871

I want to know how to calculate the average loan balance and mortgage interest that I can deduct for both the loans. 

I also wanted to know how I should enter this in TurboTax Premier desktop version. It asks me to enter both the loans separately, but then only displays the higher mortgage deduction and asks me to enter the allowed deduction. Please let me know if I should directly use the form entry instead. Thanks a lot for your help.

[StacyC · Accepted solution]

I calculated that your deductible interest should be $34,053. 

Here's the calculation: 

• First home average balance is $1,886,177 (beginning + ending balance divided by 2)
• Second home average balance for personal use is $383,665
• This means that for 4/12 of the year the mortgage average was $2,269,842 (first plus second home averages in bullets 1 & 2 above), and for 8/12 of the year it was just the $1,886,177 for the first home
• The adjusted average balance then is $2,014,065 ((2,269,842x4 + 1,886,177x8)/2)
• Take the total personal interest of $68,585 (63,714+4,871) times the limit of $1M divided by the adjusted average balance of $2,014,065 to get the deductible amount of $34,053

As far as entering this into TurboTax, I would suggest entering this as a single 1098 (enter the total interest and total balances) and then when you are asked for the interest calculated with the limitation enter the $34,053. 

[G237]

Thanks a lot for the prompt help and detailed calculations. Indeed very helpful.
If I have to enter a single 1098, should I say that I do not have a 1098 or I do? Also, can I just provide something like "Wells Fargo & Flagstar Bank" as the name of the 1098 provider? I wonder if I should offer a detailed explanation of how the amounts were calculated when TT asks me to enter information of why the amounts did not match

[StacyC]

You're welcome!

You can say that you have a 1098 and put both lenders names just as you proposed. You don't need to offer the detailed explanation with the tax return but keep a copy of the calculation with your tax return in case you ever need to provide substantiation for the amount.

[G237]

Sounds good. Thank you for the help. Appreciate it!

[G237]

I have one more question. What should be my ending balance for end of 2018
I assume it is Loan1 ending balance ($1867423) + Loan2 ending balance ($0 because I did not have it post April) which is $1867423. I ask because my CA tax changes on how I provide this number.
Thanks!

[StacyC]

You should not have an adjustment for California since it also allows $1M in mortgage interest. If you are in the State section and on the screen titled "California Mortgage Information" click Continue to the next page called "California Mortgage and Home Equity Interest" and if there is an adjustment being calculated there you can change it to zero.

[G237]

Thanks I will take a keep an eye for the absence of limit in CA section. But could you please cofirm if this is indeed the right way to calculate the ending balance of the loans in 2018?
Loan1 ending balance ($1867423) + Loan2 ending balance ($0 because I did not have it post April) which is $1867423?
Thanks!

[StacyC]

It's a little tricky with the way you have to pro-rate the 4 months differently than the 8 months. I would actually enter BOTH the beginning and ending balance as $2,014,065 so that any calculations based on average will be calculated to be $2,014,065 which takes into account the 4 months versus the 8 months and both homes.