Mortgage Interest Deduction for Multiple Mortgages during the year

[teamdeutsch]

[zomboo]

If both Loan B (construction) and Loan C (refinance) were secured by the new home, insert $0 for the months that have no balance for each loan and calculate the average for each over 12 months. This is allowed for these two loans, even though neither was held for all 12 months, because the loans were secured by the new home and you are claiming it as you primary home for all 12 months.

[teamdeutsch]

1. So do I use the end of each month as a reference point to establish the balance for each loan? As an example, since I paid off loan B on 18 OCT, the month of Oct would be $0 for Loan B and since I secured the new loan for Loan C on 18 OCT, the month of Oct would be $796k for Loan C?

2. Once i determine the overall %, do i use this % to determine how much interest can be claimed on each of the 1098's for those loans? For example, if the math shows that 97% of the interest can be deducted, do I claim 97% loan A interest, 97% loan B interest, and 97% loan C interest?

[zomboo]

If you use the Statements Provided by Your Lender averaging method, then the answer to your first question is yes. Enter $0 for loan B for October through December. For loan C, enter the ending balances for October through December and $0 for January through September. Calculate the respective averages for loans B and C by summing the monthly balances and dividing by 12. Add the average balances for loans A, B, and C together. If you follow these instructions, the total average balance for all of your mortgages will be $774,455.46 (based on the numbers you provided) which will allow to deduct 96.8% (you need to round off to three decimal places) of all the interest paid on loans A, B, and C. Note: You can also use the Interest Paid/Interest Rate method to calculate the average for loans B and C.

I am assuming that the construction loan was a stand-alone loan and was secured by a first mortgage, deed of trust or other security instrument that forfeits your ownership rights during construction if the loan was not paid. I am also assuming the loan C was an actual refinance used to payoff loan B.

In Turbo Tax, be sure to specify that loan B was refinanced in 2024 and that loan C is a refinance of a previous loan with the same Origination Date as loan B. This should the date in Box 3 of the 1098 form.

[teamdeutsch]

I am awaiting the last of the three 1098s before inputting the info into Turbo Tax. Will they provide a worksheet to reflect the calculations conducted to determine the % of interest I am allowed to claim or are those calcs all done as side math and I will just hard code the results into the 1040 myself? I am unsure of how the Loan A, B, and C info will be entered into the 1040. Can you shed any light on this? thanks!

[zomboo]

I know that the desktop version allows full access to the worksheets used for the mortgage calculations. You can even modify some of the entries in the worksheets but that often causes other errors and Turbo Tax may not e-file your return if you do. I don't think you can review the worksheets in the online version.

As far as entering the 1098s, do so in the order of origination: A then B then C. Box 3 of the 1098s for loans B and C should have the origination date for loan B.

Loan B:

This loan was paid off or refinanced in 2024 for loan B: YES (box is checked)

Is this 1098 the most recent? NO

Is this loan a refinance of a previous loan? NO

Loan C:

This loan was paid off or refinanced in 2024 for loan B: NO (box is unchecked)

Is this 1098 the most recent? YES

Is this loan a refinance of a previous loan? YES

Did you use your loan for anything besides paying off the existing loan? NO

After entering all three 1098s and clicking 'Done', you should get a notice that your mortgage deduction is being limited and the option to enter your own amount of deductible interest. Based on how turbo tax calculated the deduction last year, I am sure you will want to enter your own value. Turbo Tax would calculate the average balance for each mortgage using the opening and ending balances for the year. To determine the limit, it would add the average balance for loans A and C only (loan B is not included because it was refinanced).

Note: I didn't include the $400K down payment on loan C that you said you were planning in my previous calculations. I used $796K for Oct for Loan C. If you made the $400K down payment, you should be able to deduct all of your interest using the Statement Balance method and even Turbo Tax would probably come up with around 96%. If you didn't make the $400K down payment, the difference between the Statement Balance method and the Turbo Tax method will be significant.

[teamdeutsch]

Just double checking a few things now that i have received all three 1098s.

1. The previous table you constructed for me included all three loans (including the refinance of loan B), but you appear to be saying that Turbo Tax would 'combine' loans B and C into one. Is that correct? Is it allowed to calculate the average using the three column table approach you built for me?

2. Does the calculation for % interest allowed also get applied to points i paid on the loan? Turbo Tax combined the two values together and then applied the % to this total.

3. Can you help me identify what starting and ending reference point I should/can use for each loan especially when it comes to the loans that have a closed date?

[zomboo]

Technically, you must figure the average balance of each loan individually. The three column table you provided simply lists the ending monthly balances of each loan side-by-side with the average for each loan at the bottom. There is no 'three column table approach' to figuring the mortgage deduction. For loan A, the average balance is calculated by summing the ending balance for the months that had a balance and dividing by that number of months. It's the same for loans B and C except you divide balance sum by 12 months (this is equivalent to combining loans B and C). Add the average balances together and divide into $750K to get the % interest deductible. This approach is covered in Pub 936 but Turbo Tax doesn't use the Statements Provided by Your Lender method. Save this result to compare against what Turbo Tax comes up with.

In Turbo Tax, you will enter each 1098 in order. It will ask for the balance at the beginning of the year (1/1/2024). This is the value in box 2 of the 1098. It will ask for the balance at the end of year (12/31/2024) or the balance just before being paid off or refinanced (not $0).

After entering the 1098s, and selecting Done, Turbo Tax should ask more questions aimed at determining how long loans B and C were secured by your qualified residence. Be sure to indicate B and C were secured by your main home for all 12 months. Turbo Tax may then say your deduction is being limited and show you what it came up with and the option to enter your own amount. If the value you figured is significantly more, enter your value.

Yes, points are subject  to the % limit. Note: if points were charged on loan C and you made a down payment with your own funds that were at least equal to the amount of points paid, you can choose to include all of the points paid for loan C instead of spreading them out over the life of the loan.

[teamdeutsch]

Thanks. A few additional questions for clarification:

1. The points were only on Loan B. 

2. Loan A was closed out on 05 JUN 24, so does that mean I have to count all of JUN in the average for JUN? Can I use days vice months to calculate the average?

3. Loan B was closed out on 17 OCT 24, but I will use all 12 months to calculate the average since Loan B and Loan C are for the primary home, right? Likewise, Loan C was started on 15 OCT 24, but I will use all 12 months to calculate the average since Loan B and Loan C are for the primary home, right?

4. Turbo Tax is asking for loan balance value on 01 JAN 25. For Loan C, a payment was made on 01 JAN 25, so can I use the principal balance after the payment was applied or do I have to go with the balance prior to the payment on the 1st?

[teamdeutsch]

I forgot to ask another one.

1. If Loan A was closed out on 05 JUN, what value do i put in the JUN cell for Loan A?

2. Similar question for Loan B which was closed out on 17 OCT 24. What value do I put in the OCT cell?

Turbo Tax asks to separately input either the remaining principal balance for each loan as of 01 JAN 25 or the remaining principal balance prior to close out. What reference point for time can we use (e.g. start of month, end of month, etc.) for the cells on the table to determine the average for each loan?

[zomboo]

1. The % deductible applies to the total points paid for all your mortgages. It doesn't matter if you only paid points on loan B.

2. You can use the daily balances for loan A and divide by the number of days or you can use the beginning balance on Jan 1 and the ending balance on 04 Jun. Both of these do not include the day the loan was paid off and you must have equal payments at least monthly.

3. Correct. Remember to use the ending balances according to your statements from the lender for loans B and C.

4. It is my understanding that you do not take into account payments made on Jan 1, 2025.

[zomboo]

I think you are getting confused over the difference between the Statements Provided by Your Lender averaging method you are using and the First and Last Balance averaging method Turbo Tax uses. Both methods are described on page 12 of Pub 936.

For the Statements Provided by Your Lender, you use the ending balance on your statements. The reference point is the ending balance for the month. For the month the loan was paid off, this amount should be $0.

For the First and Last Balance method, you use the balance on the last day in the year the loan was secured by the home. The reference point is midnight 31 DEC 2024 if you did not payoff the loan in 2024 and midnight the day before the payoff date if you did pay off the loan.

[teamdeutsch]

Sorry for the nickel and dime questions, but I want to make sure I have this right. My DEC 24 statement has a statement date of 04 DEC, but the due date is 01 JAN, would I use the unpaid principal balance of $444k for my DEC cell?

[teamdeutsch]

Going back to #1 below, would I put $0 in for JUN since i paid off the loan on 05 JUN?

[zomboo]

For the Statements Provided by Your Lender averaging method, Pub 936 provides the following guidance: 'If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year.' Your interpretation of this is at least as good as mine but remember, Pub 936 only provides guidance on applying the tax regulations.

You can pick the consecutive 12 month ending balances based on the balance after the monthly payment is maid. I'm guessing that the ending balance on your December 04, 2024 statement shows the balance after applying the payment due Dec 1 ($444K) and that payments are made on the 1st of each month. This is the amount you would use for Dec and then be consistent with the preceding 11 months.

Another way to approach this is simply use the balance on the last day of the each month, whatever makes sense to you. You don't have to use the same day on all three loans but be consistent month-to-month on each loan individually.