Mortgage debt acquired prior to TCJA and refinanced this year is not coming out as fully deductible.

[maletor]

I have a situation where I refinanced and took $3,600 extra in principal out. It is my understanding only the interest on this $3,600 is not deductible.

When I enter the data in turbotax, it's using mortgage origination date. There is no way to tell Turbotax all this debt is grandfathered into being deductible (minus the extra cash out).

On home interest worksheet it classifies it as post 2017 debt. 

[maletor]

From pub 936:

Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt

TURBOTAX does not support this situation correctly.

[DianeW777]

While entering the Form 1098, make sure you have the loan origination date completed and that it is 2017 or earlier. Next, follow the steps below to find the screens to enter the $3,600 that was not used on your main home.

1. Select the correct answer for this screen: Was this loan paid off or refinanced with a different lender in 2020?
2. When you get to the screen titled: Is this loan a home equity line of credit or a loan you've ever refinanced? 
3. Answer Yes,  this is a loan I've refinanced or a home equity line of credit (HELOC).
4. Answer Yes, A mortgage loan that I've refinanced

5. Answer Yes, Have you ever pulled cash out from this loan when refinancing it?

6. Depending on your answer for number 1 above enter cash, if not Continue to follow the screen prompts to complete this entry.

Once you complete these steps you should have the results to finish your return.

[maletor]

Hi Dianne,

I have done all these steps. The loan _origination_ date is 2020 (because it's a refi). The loan _acquisition_ date is pre-TCJA. The 1098 has the 2020 date.

There must be some kind of bug because I've entered the information correctly and it continues to inflate my total mortgage balance to ~2M when it should not.

[Cynthiad66]

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. 

[maletor]

Box 2 cannot be 0.

[maletor]

"Outstanding mortgage principal must have a value."

[maletor]

Also, if I do that, then my worksheet is still broken because the later loan, the refi, is still listed as 2020 debt.

[maletor]

2020 debt only means 750k vs 1m.

so change the 1098 again?

[DMarkM1]

Entering multiple Forms 1098 may be causing an issue in your case.  At the present time, this is a known issue with Turbo Tax. 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.

[maletor]

Hey all, I downloaded the update (email notification said it was fixed). I reentered my 1098s and *it is not fixed*. I may need to talk to an expert. How do I get that setup? What should we do next?

[LinaJ2020]

If you have more than one 1098 form, I will recommend you to combine all 1098 forms and enter as one. I am attaching a TurboTax link for the instructions how to do claim your mortgage interests.  Click here:

Multiple Form 1098s

For tax years prior to 2018, your mortgage interest deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status). Beginning in 2018, this limit is lowered to $750,000.  For more information about the mortgage interest deductions, click here: Mortgage Interest deduction

[maletor]

Does this work if I cashed out on the refinance? I should still combine all 1098s?

i.e. I have $928,000 mortgage paid off 12/30/2020. I refinanced it into new mortgage at $932,000 which represents $4,000 cash out (this portion is not deductible).

[DianeW777]

No, because you used some of the cash from your refinanced loan; and your combined mortgage exceeds the $750,000 maximum your deduction is limited in two ways.

Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt. 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 (you can make the appropriate entries by selecting 'I'll enter it myself'
• See the image below for the questions that must be answered for TurboTax to calculate correctly.