Purchased 2nd home reduce mortgage interest deduction

[bynxell2u]

In 2020, we had 1 home (Home A).  Interest was $12,000 on $350,000 principal.  That $12,000 was fully deductible.

In 2021, Home A had interest of $10,000 and we bought a new Home B (bought in Nov 2021).  Home B interest was $2,000 on $750,000 principal.

According to my understanding of the IRS rules:

- Home A average balance: assume $350,000

- Home B average balance: assume $750,000 for Nov

- Total average balance is therefore $1,100,000

- Total interest: $12,000

- Qualified limit is $750,000

- Deductible percentage amount is $750,000 / $1,100,000 = .682

- Deductible interest is .682 * 12,000 = $8182

So, by buying a second home with a mortgage, I am now getting a diluting amount of deductible interest. The limit was breach for a small portion of time in 2021 but that isn't taken into consider or weighted in the calculation. It treated as if i have had a mortgage balance about $750,000 for the entire year.  Is that accurate? Has TT or IRS has any update regarding this issue?

Do I have to include the new home in the tax forms, or I can just ignore it and stick with the $10,000 from Home A as the deductible amount?

Much appreciate to hearing your advice.

[RaifH]

No, do not ignore the second Form 1098. The worksheet for multiple home mortgage interest forms should be loaded into TurboTax on February 17, 2022. This should account for the fact that you only had House B for two months of the year. The IRS allows for the average balance throughout the year, so for your second house that would be something like $750,000 * 2 / 12 = $125,000 for House B since you only had it for two months. Once the worksheet is in TurboTax, it should calculate this automatically, or you can use the average mortgage balance prescribed by the IRS.

[bynxell2u]

it is still not fixed as of today.  
How can i overwrite TT to use he average mortgage balance prescribed by the IRS?

[hound562]

@RaifH It's not fixed yet. Please help us and escalate this to the technical team! 

[RaifH]

The first home should not need to be modified if you carried the mortgage for the entire year. Report the Form 1098 just as it is using the number in Box 2 as the Outstanding Mortgage Principal.

For the second home which you purchased in November, you can use the average mortgage balance to modify the Outstanding Mortage Principal reported in Box 2. If the mortgage origination date is in November 2021, use the amount in box 2 as your outstanding mortgage for November and December. For January through October, your outstanding mortgage was 0. Your average for the year should be:

Outstanding Mortage Principal in Box 2 x

the number of months you had the mortgage / 12.

This is not perfect but it's close and if you only carried it for two months you should not be anywhere near the interest deduction limit. Take the average of all 12 months and report this in Box 2 as the outstanding mortgage principal for your second home.

TurboTax is aware of the Deductible Mortgage Interest Worksheet limitations. You can sign up for notifications here.

@bynxell2u