Mortgage Interest Deduction Limit: How to do smartsheet math, when filing as co-owners?

[giblet_CA]

Hey all!  

I co-own a house.  Both of us are listed on the 1098, and we both paid equal shares of interest on the mortgage.  My understanding is that we would both be able to deduct federal mortgage costs up to $750K, each.  

What's less clear is how to enter this in our tax returns.  The TurboTax guide on the subject advises as such:  "Each can deduct their portion of interest paid. When entering the 1098 only enter the amount that yo..."  However, if I enter half of the paid interest total in "Box 1 - Mortgage Interest", and the full outstanding mortgage principle in "Box 2 - Outstanding Mortgage Principal", Turbotax produces what I believe is an incorrect deduction calculation.

This is because, in the "Deductible Home Mortgage Interest Worksheet", Turbotax calculates the "limitation percentage" by dividing the individual deduction principal cap ($750,000) by the total value of the outstanding principal: 

 [$750,000]/[$ Outstanding Principal] = [% Limitation Percentage] 

It then multiplies this limitation percentage by the total yearly interest paid in order to get the final deductible home mortgage interest:   

[% Limitation Percentage]*[$ Interest Paid] = [$ Deductible Interest]

This approach works perfectly fine, if you're using the total [$ Interest Paid] value from your 1089.  In my case, however, I'm listing half of that value, but the calculation of the limitation percentage isn't taking that into consideration.

For example, let's say that we co-own a $2,000,000 mortgage, and jointly paid $30,000 in interest last year (with me paying $15,000 of that interest).  I should be able to deduct the interest on $750,000 of that $2,000,000 debt.  So my personal limitation rate would be [$.75M]/[$2M] = 0.375.  The total amount of interest that I should be able to deduct would be [$30,000]*[0.375] = $11,250.  My co-owner should also be able to deduct $11,250.

However, if I follow TurboTax's guidance and "only enter the amount that you actually paid, not the full amount," that limitation math gets screwed up.  I put $15,000 into "Box 1 - Mortgage Interest".  The deduction smartsheet then calculates my eligible deduction as [$15,000]*[0.375] = $5,625.

From this, I can assume that I likely need to overwrite the math on the smart sheet.  But I'm not sure how to do it.  One solution would be to enter the full interest total in Box 1, rather than just the share that I paid for, but that's in conflict with TurboTax's guidance.  Another solution would be to cut the input "outstanding mortgage principal" in half.  This would produce the correct deduction amount, but would also be a little weird, and potentially a bad solution.  What is the correct way to go about this?

[SantinoD · Accepted solution]

The correct way to enter the outstanding principal balance in TurboTax for a property you co-own is to enter half (in your case since you stated it's 50% ownership) of the amount shown on your 1098. Do the same for the amount of interest you paid. 

To get back to that section of TurboTax, use the steps below:

Here's how to enter your mortgage interest statement in TurboTax:

1. Open or continue your return, if you haven’t already
2. Locate the search bar in the upper right of your screen, and search for 1098. Select the Jump to link at the top of the search results
3. Answer Yes on the screen Did you pay any home loans in 2022?
4. On the following screens, you can choose how to enter your 1098:
   • If your lender is a TurboTax partner, you can import your Form 1098. Search for your bank or financial institution and enter your login credentials to begin the import process
   • If you prefer to upload a copy of your form from your device, or type in the info yourself, select Change how I enter my form and follow the instructions on the next screens
5. As you continue through the screens, answer the questions about your mortgage according to your situation and enter or confirm the info from your 1098

If you're using the mobile app, use these instructions.

[giblet_CA]

Gotcha, thank you for the input, Santino!