Mortgage Interest Deduction Complexity, Error?

Forum|Forum|4 years ago
April 1, 2022
1 reply
36 views

Seems like I'm not getting the right Average Mortgage Balance in the Deductible Home Mortgage Interest Worksheet.

*Home 1 was sold/paid off in Sept 2021 (started Jan 1st with 500K principal). Home purchased in 2007, refi in 2020.

*Home 2 was bought in April 2021 (started with $2.2M Principal ended with $1.4M ). Made large principal-only payment in Sept.

The average mortgage balance TT is reporting in forms is $1.8M, which is just the "Average of first and last balance method". This seems wrong - should it account for both mortgages and the fact that the home was owned only part of the year?

The "Home Debt Originating after Oct 13 1987..." section has loan 1 (i.e. Home 1) listed but only one field is filled in "Enter amount debt used to buy...". Why aren't the other fields filled in to calculate the avg balance there?

Seems like I'm much better off with "Interest paid divided by interest rate method", but I don't know how to do this for both loans and enter it into TT. Any idea?

Best answer by RaifH

The first and last method does not work if you make a large principal payment, and TurboTax calculates it on the assumption you carry the mortgage the entire year. Also, the IRS only allows the interest rate method to be used if you have the mortgage all 12 months. You're going to have to resort to the average monthly balance calculation for both of your homes. Home 1 you had about a 500k balance for 9 months out of 12, so your average monthly balance is ~$375k. Home 2 you had 0 balance for 3 months then 2.2 million for 5 months and 1.4 million for 4 months so you can take the average of that and report it in Box 2 as your Outstanding Mortgage Principal. If you use the monthly balance reported on your statements for both homes, it will come out a little more precise and give a better result since you pay off a little of the principal every month. Once you determine the average balance for both homes you report them in this way:

In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
Edit your existing 1098 or start a new one.
Answer the questions and enter the information from your Form 1098s:
1. Box 1 Mortgage interest - As reported on both 1098s
2. Box 2 Outstanding Mortgage Principal - As you calculated above for both loans
3. Box 3 Mortgage Origination Date - Use the original purchase date for the first home, back in 2007, use the date on Form 1098 for the new home
4. Boxes 5 & 6 - Use the combined totals from both 1098s
5. Make sure Box 7 is checked
Answer What kind of property is this loan secured by? Make sure one home is entered as primary, the other as secondary.
Answer Yes or No to We didn't pay any points.
Answer Yes to Let's see if this is the most recent form for this loan.
Answer No to Is this the original loan used to buy your property? for the first home
Answer Yes to Is this loan a HELOC or a refinance? for the first home
Answer No to Did you take cash out? (assuming you did not take cash out when you refinanced in 2020)
Once you are back in the Home loan deduction summary screen, click Done.
Answer NO to Do either of these apply to this loan? Answer No even if it does apply, by using the mortgage origin date of the original purchase back in step 3, TurboTax will correctly apply the proper mortgage limit on your home acquisition debt.
Enter the calculated average as the outstanding loan balance on January 1, 2022 in the first field. Enter the sale date of the first home in the second field for that loan.

TurboTax automatically calculates the average balance by using the number you report as Outstanding mortgage principal as the beginning of the year balance and the number reported as outstanding on January 1, 2022 as the end of the year balance and takes the average of those two numbers. By reporting the same number that you calculated using the average monthly balance, it will report the correct balance for both loans and apply the mortgage interest limit correctly.

R

RaifHAnswer

Level 10

The first and last method does not work if you make a large principal payment, and TurboTax calculates it on the assumption you carry the mortgage the entire year. Also, the IRS only allows the interest rate method to be used if you have the mortgage all 12 months. You're going to have to resort to the average monthly balance calculation for both of your homes. Home 1 you had about a 500k balance for 9 months out of 12, so your average monthly balance is ~$375k. Home 2 you had 0 balance for 3 months then 2.2 million for 5 months and 1.4 million for 4 months so you can take the average of that and report it in Box 2 as your Outstanding Mortgage Principal. If you use the monthly balance reported on your statements for both homes, it will come out a little more precise and give a better result since you pay off a little of the principal every month. Once you determine the average balance for both homes you report them in this way:

In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
Edit your existing 1098 or start a new one.
Answer the questions and enter the information from your Form 1098s:
1. Box 1 Mortgage interest - As reported on both 1098s
2. Box 2 Outstanding Mortgage Principal - As you calculated above for both loans
3. Box 3 Mortgage Origination Date - Use the original purchase date for the first home, back in 2007, use the date on Form 1098 for the new home
4. Boxes 5 & 6 - Use the combined totals from both 1098s
5. Make sure Box 7 is checked
Answer What kind of property is this loan secured by? Make sure one home is entered as primary, the other as secondary.
Answer Yes or No to We didn't pay any points.
Answer Yes to Let's see if this is the most recent form for this loan.
Answer No to Is this the original loan used to buy your property? for the first home
Answer Yes to Is this loan a HELOC or a refinance? for the first home
Answer No to Did you take cash out? (assuming you did not take cash out when you refinanced in 2020)
Once you are back in the Home loan deduction summary screen, click Done.
Answer NO to Do either of these apply to this loan? Answer No even if it does apply, by using the mortgage origin date of the original purchase back in step 3, TurboTax will correctly apply the proper mortgage limit on your home acquisition debt.
Enter the calculated average as the outstanding loan balance on January 1, 2022 in the first field. Enter the sale date of the first home in the second field for that loan.

TurboTax automatically calculates the average balance by using the number you report as Outstanding mortgage principal as the beginning of the year balance and the number reported as outstanding on January 1, 2022 as the end of the year balance and takes the average of those two numbers. By reporting the same number that you calculated using the average monthly balance, it will report the correct balance for both loans and apply the mortgage interest limit correctly.

S

Shonuff66Author

Level 2

Since I'm entering things that don't quite match 1098, will the IRS flag this?

This method worked upon looking at the forms. I'm surprised TT doesn't figure this out for itself. So many people must be trusting how it calculates this.

R

RaifH

Level 10

The outstanding mortgage balance you calculated as well as the other information you enter into TurboTax will go onto the TurboTax worksheets, but those are not reported to the IRS. The only number reported to the IRS is the deductible mortgage interest on Schedule A, they do not get a copy of the Form 1098 you are filling out. They can question how you generated that number, so you will want to keep any notes with your tax records to remind yourself how you derived the outstanding mortgage balance for each loan.