Mortgage Interest Deduction

[Promaine]

I sold two homes in 2021 and therefore the outstanding mortgage balance is now $0.00, but of course I did pay mortgage interest on these two homes in 2021. When I try to fill out the mortgage interest paid form I get the message that "Outstanding mortgage principal must have a value". The problem is that there is a zero outstanding mortgage principal.  What do I do?

[PatriciaV]

In general, you should enter the balance at the beginning of the tax year rather than the final balance of zero. Your outstanding mortgage principal is used to test if you can deduct all the mortgage interest you paid.

From: IRS Pub 936 (2021), Home Mortgage Interest Deduction

Home acquisition debt limit.

The total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main home and second home is limited based on when the debt is secured.

• For debt secured after October 13, 1987, and prior to December 16, 2017, the limit is $1 million ($500,000 if married filing separately).

• For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately). However, a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, is considered to have incurred the home acquisition debt prior to December 16, 2017.

[Promaine]

Thank you for the response, I will use the outstanding mortgage principal listed in block 2 of the 1098.

[DMarkM1]

Yes, you will enter the box 2 amount from your forms1098.  Later you will also be asked if you paid off each loan.  You will enter the final principle balance just before you paid it off and the date of pay off for each loan.  For any loans not paid off in 2021 you will enter the final outstanding principle amount on 31 Dec 2021 or (technically 1 Jan 2022).