Mortgage interest deduction when converting from construction to conventional loan (2024)

[MatthewM]

At the start of 2024, I was in the middle of building a new home using a construction loan. The home was completed in the middle of 2024 and the construction loan was converted by the bank into a regular mortgage (for approximately $765k).  No new documents were signed. The loan was designed to automatically convert when construction was completed.

When I received my year end mortgage statement from the bank, it indicates the year end principle balance for the mortgage was only half of the actual principle balance at the end of the year.  This appears to be limiting the amount of mortgage interest I can deduct for the year.

Looking at the IRS guidelines for allowable mortgage interest deductions (publication 936), it provides several methods for computing the average. It also states "You can use the highest mortgage balances during the year, but you may benefit most by using the average balances."

Am I allowed to use any of the methods to compute the average loan value and use the best possible method to replace the value provided on the year end mortgage statement from my bank? As it says, can I use the highest mortgage balance if that provides me the best deduction? Are there any special considerations given that my mortgage was a construction loan for part of the year?

Sorry for all the questions, but will appreciate any guidance that can be offered!

Thanks,

Matt 

[KrisD15]

Are you saying that in mid 2024 your loan balance was 765,000 (over the 750,000 limit) but that up to that point, the loan balance was less?

You say: “When I received my year end mortgage statement from the bank, it indicates the year end principle balance for the mortgage was only half of the actual principle balance at the end of the year.  This appears to be limiting the amount of mortgage interest I can deduct for the year.”

Interest can be limited if the loan balance is OVER 750,000, so I am not sure how claiming a higher balance would be advantageous for you. 

Yes, you can use a different IRS approved calculation to determine the allowed interest and edit that amount in TurboTax. 

If I am misunderstanding your question, please continue and clarify if you have two 1098 forms, or only one form and one statement, as well as the beginning and ending balances on the two loans, or if everything was listed on one 1098 since it was just a continuation of the loan. 

[MatthewM]

Thanks for the reply, Kris!

I received a single 1098 which said the end-of-year principle balance was $382k. The actual year-end balance was $762k. When entering the data from the 1098 into TT, I used the $382k number from the 1098 for the year end balance but this seems to be limiting the amount of the mortgage interest I can use as a deduction for the year. 

The starting principle balance for the loan was $765k. It was the same loan all year in that I only did one closing and there was no new documentation when the construction was complete and the loan switched from being a construction loan to a regular mortgage. 

I'm not sure why the bank said the year end principle balance was only $382k. The only thing I can think of is that maybe they took the average of the balance over the course of the year and because it was a construction loan on Jan 1, it considered the principle balance at that time to be $0? In case it is significant, I was paying interest only during the construction period.

If it is valid to use one of these other means to represent the year-end value for the loan, it may be beneficial for me to do that. Even if the limit I was using was $750k, I'd think that would enable me to deduct more of the interest than if I'm using the $382k that the bank said it was.