I refinanced my home and purchased a point and then my loan was sold to another lender. I have three 1098 forms and a lot of questions

[lchan]

Hello,
I refinanced my primary home in 2020 from the original lender of the loan (call it Lender A) . My refi started through Lender B and I paid 1 point for a lower interest rate. I made one monthly payment to Lender B. The loan was then sold to Lender C. I now have 1098 forms from each lender. 

First question - When exactly do I input the point I bought on my refinanced loan? My initial impression is to enter it with the 1098 information from Lender B - the lender that I started the refinance with. Then when I enter the 1098 information for Lender C, I do not duplicate the information about the point..is this correct?

Second question - On the 1098 forms from Lender B and C, the Mortgage origination dates (Box 3) to do not make sense. The date on the 1098 from Lender B is a month after the date on the 1098 from Lender C. Does this matter? 

Third question - I've noticed that once everything is all entered, the amount of Mortgage Interest that is deducted is about half of what it was last year even though the amount of interest paid was nearly the same. Can someone explain why refinancing has made the deduction so much less? 

I hope my questions make sense. Let me know how I can make anything more clear. Thank you!!

[Cynthiad66]

First question.  You entered the points accurately and do not duplicate.  Second question does not matter.  The third question might be based on how you answered questions about the refinance.  Was this a Cash Out refinance?  What you did with the money?    Here is some information that will assist you.

It’s important that we go over exactly how cash-out refinances work before we look at how the IRS views the money you get from this transaction. Basically, you replace your existing mortgage with a loan that has a higher principal balance. Your lender then gives you the difference in cash. You can use the money from a cash-out refinance for almost anything. Many homeowners use it to consolidate debt or make home improvements.

The cash you take out of your equity during a refinance isn’t considered income by the IRS. However, there are limitations on deductions that you can take when you refinance your loan. You may only discount interest you pay on your new loan if you use your cash to make a capital improvement on your property. 

Something to keep in mind is that refinancing your mortgage can significantly reduce your total tax deductions. Refinancing to a lower mortgage rate means you'll be paying less interest, which means you'll have less mortgage interest to deduct when tax time comes around. The difference can be substantial.

[lchan]

Thank you for your response. It helped to answer my first two questions. I didn't pull any cash out in the refi, so that simplifies that, at least. 

After more reading on here I've figured out that the problem is that TT is adding all the mortgage values together instead of averaging them. This puts me over the cap and thus limits my deduction. TT needs to find a fix to this problem. A lot of people are having issues with this. 

[DaveF1006]

Some TurboTax customers are experiencing an issue with their Home Mortgage Average Balance. This can cause in the the Home Mortgage Interest to be incorrectly limited.

If you're experiencing  the issue above,  please go here to receive email notifications when any updates related to this issue become available.

[Erikw13]

So if you do take the cash from the refinance and do a capital improvement is the loan amount then eligible to be deducted?  If part of the cash is used for the house and part not is it a matter of percentage of the money used towards the house?

"The cash you take out of your equity during a refinance isn’t considered income by the IRS. However, there are limitations on deductions that you can take when you refinance your loan. You may only discount interest you pay on your new loan if you use your cash to make a capital improvement on your property. "

[DaveF1006]

It depends. If the money is used to make a capital improvement, then the full amount of the interest from the loan is deductible interest. If part of the proceeds were used to improve the home, only that percentage of the loan interest is deductible. For an example, if you spent 50% of the proceeds for improvements, only 50% of the interest on that loan is tax-deductible.

Your understanding on this topic is 100% accurate.

[Erikw13]

Just so I make sure I have the full answer.  If the loan is a refinance and cash out the concept remains the same as to the amount of interest that can be deducted since most of the loan was used to refinance the loan and then 40k cash out.  The variable % would apply to the 40k cash out portion.  I believe this is the correct way to look at it but confirmation would be good.  🙂

[DianeW777]

Yes, in your example if you used $40k from the loan proceeds on something other than to buy, build or improve your home, that prorated share of mortgage interest would NOT be deductible.

TurboTax will calculate the amount of allowed mortgage interest deduction based on your entry or you can choose to make the entries yourself.

• To review the information and worksheets you can use this link: IRS Publication 936, page 12.

[Erikw13]

Since I have multiple 1098's due to the refinance I have read and experienced the issue of less than the total of my interest due to the averaging of balances glitch.  Since the works sheets are not submitted to the IRS would it not be easier to enter the total interest deduction straight onto the Schedule A for interest deduction?  I would prefer to have TT do it but I do not feel it will be addressed soon enough based on what I have read here

[JoannaB2]

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

Please sign up for email notifications when an update related to this issue is available here.

See also this TurboTax Help.

[Erikw13]

So i updated the desktop version with the supposed fix for the loan balances being added together when calculating the overall loan amount for Mortgage interest deduction.  I am still having an issue with the mortgage interest being reduced and that should not be the case.

• Original Loan $521,576 originated 09/21/2016
• HELOC Loan Balance $96734 originated 04/30/2018
• Original Loan refinanced 08/2020 - $514,062  / Took out 40K
  • New Loan - $566,006 - One payment was made to this lender then they sold it to
  • 2nd Lender - $566,006 and have been paying them ever since
• So I have 4 1098's
• All proceeds have been used on the house to upgrade 
• I cannot get the program to allow all of the mortgage interest and it should since non of the loans were ever over 750K
• I manually edited the Schedule A and it works correctly until I get to the State return then the issues impact the State mortgage data

Not sure what to do as I have been doing my taxes for 35 years and have never had this kind of issue

[JoannaB2]

Some Turbo Tax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your return.  See  this link  for what to do if you have multiple 1098s.  See also this Turbo Tax Help.

[Erikw13]

Do you know if it impacts the state return as well?  I am seeing that the CA state return is wanting to make (-) adjustments.  The link did seem to solve the Federal issues.

[DianeW777]

California (CA) does not conform with federal law.  If your deduction was limited on the federal return enter an adjustment on itemized deductions for the amount over the federal limit on your CA return. Make sure your CA return is allowing the deduction for mortgage interest in full or up to the limits allowed shown below.

• CA allows deductions for home mortgage interest on mortgages up to $1 million plus up to $100,000 in equity debt. 
  • Tax Deductions for CA

[Erikw13]

Understood and that is the issue I am having.  The federal has no limitations but the state seems to be making an adjustment for no reason.  I feel this is a software glitch or something is preventing the application from updating with adjustments made to the federal return.