Construction to Permanent Loan over a calendar year end question

[trheiner2]

My wife and I started to build our home in June 2023.  It was finished in March 2024.  When it was completed, the bank we used had us pay off the construction loan with a refinance to a permanent Mortgage.  They sent us two(2) 1098s in 2024.  The first one was for the interest paid on the construction loan from January 1st to March 15th, and the second one was for the mortgage interest we paid on the permanent loan from April 2024 through the end of 2024.

I can't get Turbotax to treat these as a single related event.  It wants to treat them additively and it puts me over $1 million for the cost of the home so it negates my interest credit.

Please help me figure out how to enter these two 1098s properly in the software so that it doesn't look like I have a house that is over $1 million.

[zomboo]

You didn't specify how you are entering your 1098's. They should be entered in the order of origination date. For the construction mortgage, specify 'This loan was paid off or refinanced in 2024." and "This is not the latest 1098." For the permanent mortgage specify "This loan is a refinance of a previous loan." and "This is the latest or only 1098."

[trheiner2]

Thank you.  That makes sense.  I'm going to give it a shot and see the results.  Appreciate your help!

[Brian_4923]

I have a very similar situation here and the software essentially allows me to deduct all of my interest from the 1098s, based on your direction.  My concern is that the start value + end value of the two loans divided by 2 still exceed the $1M mark.  So why doesn't the software reduce the total interest by the % difference here?  Is it because construction loans are treaded differently within Publication 936 here?.  

[zomboo]

Construction loans are not treated differently in Pub 936. However, since draws are usually taken out as needed to pay for materials and construction costs, you have to use the end balances from monthly statements to figure the average balance. Also, converting the construction loan to a permanent loan is a refinancing of the construction loan so it's like one continuous loan from the start of the construction loan to the end of the permanent loan (or end of the tax year). Figure the average balance by summing the end balances from your monthly statements and dividing by the total number of months.

Turbo Tax does not use the statement balance method. It uses the beginning and end balances to figure the average balance. Also, at least in prior years, Turbo Tax did not include the refinanced loan balance to determine if the average balance exceeds the limit of $750K (a software hack to avoid adding the two balances together causing excessive limiting of deductible interest on refinanced mortgages).

If you provide details of your mortgages, it may help explain what is happening with your return.

[Brian_4923]

Thanks for the reply.  Everything you said makes sense.  I assume that when you say "summing the end balances each month and dividing by the total # of months" that this is within the tax year only and not the origination date of the construction loan.   For example, I start at 1/1/2024 and end at 12/31/2024 for a total value and divide by 12.   If I do this, I essentially get roughly $867K average balance.

Given that the construction loan originated in 2022, and it essentially zeroed out the previous mortgage of my primary home, bought prior to 2017, I would expect my limit for interest deduction to be $1M instead of the $750K?  So how does Turbo tax even know this information if I didn't provide that to them to determine this?

[zomboo]

Yes, use the ending balances for the 12 months of the tax year. See 'Statements provided by your lender' in the lower middle of Pub 936 p.10.

I really don't know what you mean by "Given that the construction loan originated in 2022, and it essentially zeroed out the previous mortgage of my primary home, bought prior to 2017". Did you use any funds from the construction loan to refinance a previous mortgage? Is there more than a 2024 construction loan conversion to permanent mortgage going on here?