Pro Rate Mortgage Interest and Property Taxes

[djpmarconi]

My tax return e-file has been rejected twice by the IRS. Both have to do with adjusments to Mortgage Interest and Property Tax duduction.
Here is the situation:
I rent a room in my house to a company. They pay me rent and they issue me a 1099-MISC. I claim that on Schedule E and a portion (pro-rated) of property taxes and mortgage interest as an expense against that rent. I then show these two deductions as an adjustment on Schedule A (I still get a better deduction versus the standard deduction) by showing them as negative amounts in the columns for mortgage interest and property taxes. The IRS doesn't like that and I am surprised Turbo Tax lets it happen without flagging it as an error. So apparently TT doesn't know about the IRS rules in this case or I guess I can just ignore the adjustment and double dip on the expense. The only alternative would be to make the adjustments and take the correct deduction on Schedule A and file via mail instead of e-filing. If anyone knows a work around let me know.

[VolvoGirl]

I’m not sure how it works but don’t you enter the full amount on Schedule E and the percentage used and Turbo Tax calculates the amount for rental expenses and puts the rest on Schedule A?  Don’t think you need to do anything on A.   

[djpmarconi]

I know it works that way for office in the home but it doen't ask that on schedule E as it is looking at the rental as a property so any expense like utilities, maintenance, etc. has to be manually pro-rated. Unless I am missing something.

[VolvoGirl]

Then aren’t you just entering the pro rated amounts on E and manually enter the other parts on A.   Why are you entering them as negative amounts on A?  You don’t need to enter the actual 1098.   

[djpmarconi]

The amount going to A can't be adjusted as it reads the 1098 information. I can add interest from a source where I did not receive a 1098. Example if I were paying for a seller financed mortgage and no 1098 issued. However to adjust for the interest taken as an expense on E I put that amount on A as a negative to deduct it from the deductible interest from the 1098.

[djpmarconi]

What do you mean I do not have to put in the 1098 amount? The IRS matches that amount with what I put on the return. If it doesn't match it might red flag the return.

[VolvoGirl]

You don’t have to enter the 1098.  Just enter the right amounts in the right places.   If you took the Standard Deduction the 1098 wouldn’t show up on your return at all.   It’s not like income that the IRS matches to your W2 or 1099 forms.   And anyway you are not claiming more on SCH A.   They don’t care about you claiming less deductions.   

[Mike9241]

there can be reasons why the full amount of 1098 interest is not deductible on schedule A.  so i would not enter a negative amount for either taxes or interest but show only the deductible amount  on schedule A. You do not have to tell the iRS the reason.