2 homes and 2 loans, one converted to a rental how to deduct mortgage interest

[jpalatinus]

So I had one home secured by a loan for $1 million prior to 2016 and converted to a rental in  July 2020 and I purchased a new home in July 2020 secured by a new loan for 780k.  I thought I could personally itemize and deduct 1/2 of the mortgage interest for the first loan  (until July 2020) and then the interest on the first 750K of the second loan, so I reduced the 1098 amount from the first loan by 1/2 and included 1/2 in my rental expenses for the first house. but turbo tax seems to think I had 2 loans totaling 1.78 million and I believe limits my deduction inappropriately.  (to interest on 1.1 million)  Am I incorrect that I can personally deduct 1/2 the mortgage interest for the first loan and the full deductible amount for the second loan?

[Cynthiad66]

Yes you are correct.  However, there may be a problem in the total loan balance.  TurboTax may be adding the outstanding balances together.  You should go in to manually adjust the outstanding balance  down to the $750,000.  Box 2 on 1098 INT.

Please try this:

If there is a refi and there was an outstanding mortgage principal listed in both of them on Line 2 on the 1098. When you do put an outstanding balance in both forms, then the program adds them together and if that number is greater than $750k, then it puts you in the category to "limit interest". To get that to go away, you need to go back to the deductions section and click on "edit" mortgage interest statement. Change the line 2 of the mortgage that you no longer owe on (like the one that you refinanced and paid off) to a 0 (zero) because you have refinanced out of that loan and no longer have an "outstanding mortgage principal". Once you change one of them to zero (the one that was paid off by the refinance) then it should no longer pop up with that error at the end when you go to file. 

[jpalatinus]

There was no refinance, I own one home that I moved out of on July 1 and I purchased another home July 1.  S0 I have two 1098s for 2 different houses that I own.  One that I owned all year but lived in for first half, and one that I bought right in the middle and lived in the remainder.  I can legitimately deduct 1/2 the mortgage interest of house one from my rental income for the second Half of the year, but can I deduct the mortgage invest for the first half of the year for the first house and the full amount (up to 750) for the second house?  Can I adjust the outstanding balance for the first house to 1/2 the value and the interest to 1/2 and then incorporate the rest of the 1098 in my rental expenses?  is that valid or will the ira see my 1098 and not like that I put half of the balance in the rental and 1/2 in personal?

[rcsaxena]

was there ever a resolution here? great question

[AmyC]

The IRS is accustomed to see one mortgage split between sch A and sch E. That is not a problem. The schedule A portion would be half the year subject to limitations during that time. For limitations, see Publication 936 (2021), Home Mortgage Interest Deduction - IRS

Example: Mortgage interest limited to 80% and 6 months. Then example interest of $30,000 would deduct on sch A as $30,000 x 80% times 1/2 year year = $12,000 deduction on sch A. 

@rcsaxena

@jpalatinus