Question on entering Mortgage Interest Deduction Two Properties

[AndyTTT]

Hello TurboTax Community,

I'm using TurboTax to file my 2023 taxes and have a few questions about correctly entering mortgage interest deductions for two properties (second one acquired during the year).

Here's my situation:

1. Mortgage-A (Originated in 2015):
• 1098 Reported Interest: $16,197 (for January-December 2023)
• Falls under the rules for loans acquired after October 13, 1987, and before December 16, 2017, which is subject to the $1,000,000 limit.
• The average balance is $523,709, which is within the limit, so the full interest paid ($16,197) is deductible.
2. Mortgage-B (Originated on 9/29/2023):
• 1098 Reported Interest: $12,295.03 (for November and December 2023 only)
• Falls under the rules for loans acquired after December 15, 2017, subject to the $750,000 limit.
• The average balance for Mortgage-B is $1,040,946, which exceeds the $750,000 limit. The deductible interest is prorated using "Loan Balance Limitation Proration": 12,295× (750,000 / 1,040,946) ≈ 8,854.71

Total Deductible Interest:
Mortgage-A: $16,197
Mortgage-B: $8,854.71
Total = $25,051.71

TurboTax Adjustments:

1. TurboTax calculated a deductible interest of $20,520 using the 'average of the first and last balance' method. However, I used the 'average loan balance method' shown above (outlined in IRS Publication 936) to more accurately reflect the loan balances throughout the year and results in a higher deductible amount. To correct this, I added the additional deductible interest ($4,531) to Line 8b, "Home mortgage interest not reported to you on Form 1098."
2. Additionally, my closing document for Mortgage-B shows prepaid interest of -$418.12 (from 10/3/23 to 10/1/23 at $209.06 per day). I added this to the total interest not reported on Form 1098: $4,531 + $418 = $4,949.

Questions:

1. Is my calculation of deductible interest correct, especially the proration for Mortgage B?
2. Did I enter the additional deductible amount ($5,400) correctly in TurboTax by adding it to Line 8b?
3. Is it correct to include the $400 prepaid interest in this calculation, or should it be handled differently?

I want to ensure I'm claiming the right deduction and using TurboTax correctly. Any guidance would be greatly appreciated! Thank you!

[tagteam]

I'm going to page Champ @Mike9241 for this. Check back later.

[Mike9241]

nope. you are in essence deducting interest on about 1.2 M in mortgage debt when your cap is $750K

see IRS pub 936 table 1. the cap applies to total mortgage debt. there is no separate limit for pre and post

see line 11 of deductible home mortgage interest worksheet

put another way say your pre12/15/2017 average loan balance was $1,000,000

and post average loan balance was $750,000

under your method you would be deducting interest on 1,750,000

also, no basis for adding in the over $4K in interest that wasn't actually paid. using the average monthly loan balance because is higher than the overall average will automatically give you a higher deduction. you can't count the time this mortgage didn't exist

what do I think the proper deduction should be - assuming average monthly mortgage balances computed correctly 

750,000/ (523709 {assumes monthly average to be consistent with the other} +1040946) * (16197+12295+418)

this should be consistent with the results using table 1 in the IRS PUB and with proper input into Turbotax

i tried both and they both came up with the virtually the same amount ($1 rounding difference)

[andyjj]

@Mike9241

Thank you for your response and assistance! I’m starting to understand this deduction better now, as well as Table 1. However, I’ve noticed a discrepancy in TurboTax when entering these numbers. I forgot to mention that Mortgage A was refinanced in 2021 and that appears to be affecting things...

On the Deductible Home Mortgage Interest Worksheet — Part 2, Qualified Loan Limit — Line 2 is left blank, which results in a different value on Line 12 of $1,041,350, and an amount of $20,520 on line 22 (Sched A). The value changes depending on whether I select “Yes” or “No” to the question, “Was this loan the result of refinancing a previous loan?”.  Is this a bug in TurboTax? Why would TurboTax not be including loan A if its a refinance?

Also, you mentioned that I should add the $418 prepaid interest, but where exactly should I input that?  In the total interest not reported on Form 1098 section?