Bug in TurboTax? Mortgage interest deduction limits on second home.

[israelforst]

Hi, can you share the correct way how to calculate the 2 house situation? 

I have the first house bought before 2017 and my beginning principal balance was around $0.8m and ending balance of 2020 was around $0.6m. mortgage $25k.  

My second house was bought in August 2020 with a balance of $0.4m and then a ending balance on Dec. 31 2020 of $0.3m, mortgage of $1k. 

I am not sure if I have $1m or $1.1m cap on the indebtness either. 

Thanks,

[agingclimber]

The relevant worksheet for your situation is Table 1 in Publication 936. It's pretty self-explanatory, and it produces your qualified loan limit on Line 11 and your deductible mortgage interest on Line 15. 

Turbotax does the worksheet calculation correctly, but then it puts the wrong amount in Line 8a on Schedule A. (At least that was the case when I filed my taxes, which was quite a while ago.)

[jcrane0513]

Ok. I'm back to my returns and decided I would enter the 1098s as reported to me. Since TT STILL fails to compute the limitation correctly, I computed it manually offline. Then I went to Schedule A in TT to override the amount of interest and points deductions.

CA properly computes the interest limitation so I don't need overrides there.

Then I tried to e-file and TT will not allow me to do that since I overrode amounts on Schedule A even though the amounts I entered are correct. It tells me to delete the overrides, which will produce excess tax deductions and a greater refund than I deserve. I wonder if I filed this way, if TT would handle my audit, interest, and penalty costs gratis since their system is the point of failure.

I tried another route which was to delete all 1098s and then enter a combined 1098 for the two loans with amounts necessary to deliver the correct Pub 936 limitation. This works for federal, BUT then CA is not correct!

Absolutely ridiculously frustrating! If I'm venting while an obvious answer is out there, it's because nothing on this community appears to address the problem.

Has anyone found a workaround to solve correct deduction for fed and state and allow e-filing?

[agingclimber]

I also tried to override the Schedule A entry, but could not make it work. Eventually I did what I described in my March 15 post: I fed TT fictitious interest payment data (while NOT checking the "amount is different" box) designed to make the deduction on Schedule A work out correctly. This means my worksheets within TT are wrong, but everything submitted to the IRS is correct. My state return is for OR, and the above procedure did not result in any problems. I don't know what would happen with a CA state return.

Agreed that it's absolutely infuriating that Intuit just ignores this issue, months after several users have pointed it out. 

[tsrkum]

I have a question in this regard as to how Turbotax calculates the interest limitation. I am not sure if I am reading the pub 936 correctly.

In my case, i had a primary home which was brought prior to December 2017 and had a beginning mortgage balance of 292K as of Jan 2021. I bought a new home - closed on March 31, 2021 with a starting mortgage balance of 623K and made it as my primary home with an ending mortgage balance of 614K as of end of 2021 

I sold the old home and it closed on June 4,2021 when the mortgage balance was roughly 290K.

For these 2 overlapping months, my mortgage balance was above 900K. I am not finding a clear solution explained by IRS for these partial overlap scenarios. 

Which one of this is the right way to figure out the average mortgage balance for 2021 to arrive at the interest deduction limit.

Option A -

Irrespective of the fact that my mortgage balance shot over the 750 k limit for those just 2 overlapping months - Should I use this 

(Total Interest paid in 2021) * Average Mortgage balance of the first home (~291K) / Average Mortgage balance of the 2nd home (~617K)

Option B - 

Calculate average monthly mortgage balance for each mortgage for all the 12 months (adding the monthly balance for Mortgage A and Mortgage B  for each month, then sum up all the 12 months and divide by 12 to arrive at the average mortgage balance for the year) . With this, the monthly balance would be 0 for certain months for the old home and ditto for the new home (the months when i didn't own it) and the end result would be that my average mortgage balance for the year would still be under 750K rendering the entire interest as deductable.

Not sure which approach is right.

Any thoughts?

[MarilynG1]

The IRS advises that you calculate the Average Mortgage Balance for each loan separately and add together.

Click this link for more info on Table 1. Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the.... 

[tsrkum]

The concern is how do we calculate the average balance for both the mortgages.

There are 2 methods listed and the first 2 (first and last balance divided by 2 / total interest paid by interest rate) cannot be used as the criteria listed for those will not satisfied.

This leaves me with only the third option (Statements provided by your lender).

The question now is do i divide the total of average balance for each month (with 0 for months that i didn't own the home) by 12 or do i divide it by the number of months i owned the home (say 6 for the home i sold and 9 for the new home i bought)?

Obviously, dividing by 12 would be beneficial and put me well under 750K (because it was only for 2 months that my combined mortgage was above the 750K).

But I am not sure how to interpret the IRS rules with this 3rd method.

[DianeW777]

You should use the number of months you actually had home during the year, secured by the loan.

• For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. 

  If your lender can give you your average balance for the year, you can use that amount.

[mfdesquire]

I'm a tax attorney, and I hate to tell you this, but the table in 936 is 100% dead wrong.  Using it will hurt you BADLY if you refinance.

The average balance of a loan for the year is NOT the starting balance plus the ending balance divided by two, UNLESS you had the loan for the entire year.  If you only had the loan for part of a year, then the average balance is the starting plus the ending multiplied by the number of days you had the loan and divided by 365.

Let's take an example.  Mary takes out a $750,000 interest-only bridge loan on January 1 to buy a new house.   For the first six months of the year, she pays $10,000 in interest (includes origination fee interest).  She then sells her old house, and on July 1, the $750,000 is refinanced into Loan 2 with no cash-out, for which she pays $1,500 in interest for the remainder of the year.  Let's say her ending balance is $740,000.

She never had more than $750,000 outstanding, so all $11,500 is deductible. 

The IRS worksheet, however, gets this VERY wrong.  It would have  you ADD the two loans together as if both were in effect the whole year, so that Mary's acquisition debt is $750,000 + $745,000 = $1,495,000.   Then it would apply the $750K limitation and only let her deduct about half of the interest she paid.  Insanity - and wrong.

Unfortunately, TurboTax does the same thing.

To make it work correctly, you have to enter only ONE loan into Turbotax.   In box 1, you put the TOTAL interest you paid for both loans.  In box 2, you put the origination date of the earlier mortgage.  Then you give the starting balance of the first mortgage and the ending balance of the second mortgage.  That gets things right.

[mfdesquire]

It's unclear what the IRS would have in mind, but in theory, the right answer is as follows:

*Compute the average balance on both loans every month (every day would be better, but that's going too far).  You can take the balance at the beginning of the month and end of the month and divide by two to get an approximation if the bank doesn't tell you your ADB for the month.

*For each month, add the two average balances together to get a total monthly balance

*In 10 of the months (if I recall your dates right), you will have a monthly balance less than $750K. In 2 of the months, you will have a monthly balance higher than $750K

*For the two months with a balance higher than $750K, compute the fraction 750K / total monthly balance

*Use 1 (100%) for the ten months and your fractions for the two months.  So (10+x+y)/12, where x and y are the fractions (expressed as decimals) for the two months.

*The result will be the fraction of your debt you can deduct.

[BJOlmsted]

I am having a similar problem .  Sold a primary residence and bought another one.  The interest on both should be fully deductible but the program limits my deduction by 5000.00. Can't override the amount on the

schedule A.  Told me to start all over but that didn't change anything and now say to uninstall and reinstall the whole thing.  Doesn't sound like that will work either.

[DMarkM1]

You should not need to uninstall and reinstall TurboTax.  Please clarify each of your form 1098 boxes 1, 2, and 3 by posting here.  Someone may be able to assist with the TurboTax entries for the correct calculation.  

Bottom line is:  If you had one primary home mortgage and sold/paid off that home that had a mortgage balance less than 750,000 (375,000 if married filing separately) and subsequently bought another primary/second home with a mortgage balance of less than 750,000 (375,000 if married filing separately) then all of your mortgage interest would be deductible.     

@BJOlmsted 

[rapaulino27]

Thanks for post! I have been looking for solution to my problem and your post put me in the right direction.  Your example is very close to my case, except that my outstanding loans are not close to those numbers.  I have a Primary loan with balance of 232K and a second home loan with a balance of 138K.  Both of these loans were taken after 2017.  When I enter the 1098 information for these loans, Turbo Tax computes the total interest correctly but what it puts in line 8a after the analysis is only the interest that I paid for the secondary home loan!  When I tried to compute the number that should be in 8a line, I come with a value that it is even higher than the sum of the 2 interest in the 2 1098.  This seems to indicate to me that the equation as stated does not apply to my case (?)  HELP

[AmyC]

The program offers you a chance to make adjustments after entering the forms. Make your correction there. My guess is that some question got answered differently than the computer thinks so it limited your credit.

If you add the two 1098 forms together, that is the maximum you can take. Any amounts used for nonqualified mortgage debt must be subtracted out. 

Because the mortgage interest is going to a worksheet to make calculations, the adjustment is allowed and goes straight sch A. Another option, just enter one form and put the total allowed up to the total of the two forms as all paid on one form. The form's worksheet does not go into the IRS so your return is not wrong when you make adjustments or change the numbers on forms.

The IRS has a quick quiz to help you determine the deductible amount. See Can I Deduct My Mortgage-Related Expenses?

[zomboo]

I have to say you should not enter anything but your two 1098s as reported to you but review the worksheets for each loan to ensure everything is correct and make changes as needed. AmyC is correct in her first suggestion that some information may not have entered correctly or messed up somehow along the way. Any anomalies may be easier to spot and correct directly on the worksheets. In rapaulino27's situation, all interest is deductible simply because the total of the two mortgages are less than $750K (assuming all debt was used to buy or improve the homes).