2nd Home Mortgage is reducing my interest deduction?

[hsteel]

In 2019, we had 1 home (Home A).  Interest was $25,000 on $500,000 principal.  That $25,000 was fully deductible.

In 2020, Home A had interest of $24,000 and we bought a new Home B (bought in July 2020).  Home B interest was $20,000 on $1,500,000 principal.

According to my understanding of the IRS rules:

- Home A average balance: assume $500,000

- Home B average balance: assume $1,500,000 for July through December

- Total average balance is therefore $2,000,000

- Total interest: $44,000

- Qualified limit is $750,000

- Deductible percentage amount is $750,000 / $2,000,000 = .375 

- Deductible interest is .375 * 44,000 = $16,500

So, by buying a second home with a mortgage, I am now getting a lower amount of deductible interest.  Is that accurate?

Do I have to include the new home in the tax forms, or I can just ignore it and stick with the $24,000 from Home A as the deductible amount?

[Cynthiad66]

You are able to take the accurate amount of Home Mortgage interest to reflect the purchase of a new home.  Please try this:

First, adjust your total mortgage down to the $750,000.00.  Also, adjust the interest down to the amount that would apply to $750,000.00 loan amount.

How much mortgage interest can you deduct in 2020? For the 2020 tax year, the mortgage interest deduction limit is $750,000, which means homeowners can deduct the interest paid on up to $750,000 in mortgage debt.

The IRS lets you deduct your mortgage interest, but only if you itemize deductions. You can't deduct the principal (the borrowed money you're paying back).

In addition to itemizing, these conditions must be met for mortgage interest to be deductible:

• The loan is secured, which means the lender has some kind of guarantee of payment, usually in the form of property. If a borrower defaults on payments, the lender can seize the property that’s securing the loan. If you’re buying or refinancing a home, especially if it’s your first home, the loan is usually secured by the home you’re buying or refinancing.
• The home with the secured loan must have sleeping, cooking, and toilet facilities.
• The debt can’t exceed $750,000 (or $1,000,000 if the loan was taken before December 16, 2017) in order to get the full deduction.
• You or someone on your tax return must have signed or co-signed the loan.
• If you rented out the home, you must have used the home more than 14 days during the tax year or 10% of the number of days you rented it out, whichever is greater.

Mortgage interest is usually reported on Form 1098, Mortgage Interest Statement. After you enter your 1098 in TurboTax, we'll ask a series of follow-up questions to make sure you're qualified to take the deduction.

For tax years 2018 through 2025, you can only deduct the interest from the amount of your loan that was used to buy, build, or improve the home that it’s secured by.

If you’ve ever used part of this loan to pay for things other than this home, you cannot deduct the interest from that amount of the loan, even if the transaction didn’t take place this year.

Don’t worry, we’ll help figure out what amount of interest you can deduct.

Examples of common ways you might have used this money not on your home include:

• Making a down payment on a different home
• Funding improvements on a different home
• Making a payment on a different loan or debt
• Having miscellaneous large purchases

Example: John took out a home equity line of credit on his home on Tuberose Street for $40,000. He used $25,000 to remodel his kitchen and bathrooms in his Tuberose Street home, and $15,000 as a down payment on a second house on Snowdrop Lane. He can only deduct the interest he paid on $25,000 he used to improve his Tuberose Street home.

You cannot claim a mortgage interest deduction unless you itemize your deductions. This requires you to use Form 1040 to file your taxes, and Schedule A to report your itemized expenses. The interest payments and points you pay are combined with all other deductions you claim on Schedule A; the total of which reduces your income that is subject to tax on the second page of your tax return.

[seniorfam]

This does not answer the question.

[DianeW777]

Working through the Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For The Current ..., Publication 936, page 12, the deductible mortgage interest using the figures you present in your example would be $22,000.

Work through this worksheet and then enter the total deductible mortgage interest manually and keep the worksheet in your files.

[hsteel]

Seems wrong that by getting a second house, the deduction is less - $22,000 with both homes or $24,000 with just the first home.  I’m assuming I can just ignore the second home and take the deduction only on the first home ($24,000).

[seniorfam]

I note that the link you posted is still in draft.  Should we wait until it is finalized before filing?  I have a situation where we had a bridge Loan to buy a second house and then sold the first house and then the new mortgage on the second house was sold.  So many 1098s and TurboTax is getting it wrong.

[Cynthiad66]

@seniorfam  Yes.

It is best to wait until the software has been programmed to properly calculate the interest.  But I know  most people are very anxious to see the numbers and file.  The main goal is to be able to deduct the correct amount of interest based on the Form 1098s that you have received.

[purdueu96]

When will Turbotax be updated to calculate correctly? I am having the exact same situation as the original question. We purchased a new house and sold our old house last year. When I enter the 1098 for the new house, by deduction goes way down which doesn't seem right. I'm working through the worksheet on pg 12 (https://www.irs.gov/pub/irs-pdf/p936.pdf) now to see if it matches what Turbotax is giving me.

[seniorfam]

Do you know when this will be done?

[DaveF1006]

It depends. Enter 0 as the mortgage balance for the first 1098-T and fill out the rest of the information. For the 1098-T for the new loan, enter the current mortgage balance. If you do this, you should be able to deduct the total amounts of your interest payments.

[lty900301]

I have similar situation where I purchased a home in 2020 and by entering the new 1098, the average principle increased significantly and the deductible interests reduced. 

Can I only file 1098 for my first home and ignore the second home?

[JohnB5677]

If you sold a home the balance on your mortgage will have been paid off and it should be recorded as zero.

If you've refinanced or had your mortgage lender changed, the outstanding mortgage principal listed in the combined total of them on Line 2 of the 1098 will be too large.

When you 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. Enter both 1098's.

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".

@lty900301

[lty900301]

For me. It’s simply a case of purchasing the 2nd home. No selling, no refinancing. So I shouldn’t enter 0 on line 2 as that’s not correct. Am I required to enter both 1098?

[seniorfam]

I bought a new primary home and then sold our primary home.  The mortgage on the second one alone is higher than the $750k threshold.  What do you advise?

[DaveF1006]

Yes, Ity900301, you will need to include both 1098's and enter both mortgages amounts in each Box 2 of the 1098.To seniorfam, you need to enter an average loan balance between the two homes in the first 1098 and leave the second blank. Read this IRS link and scroll to the area of the publication where it mentions average loan balances. There is a worksheet in the section that will help you determine the value. In fact, you can scroll to the bottom of the publication to the table of contents and then look for average loan balances.