Mortgage Interest First Primary converted to Rental, Second Primary bought And Refinanced

[amanolak512]

Hi,

I have a first property (with a first loan of 350K) that i converted from primary to rental in June 2020. Bought a second property after taking a second loan for 650K and also refinanced it during 2020. Total I have 3 1098s. Note that i 've been following the other open topic with multiple 1098s and the issue that TT has, so this thread is NOT trying to ask the same. Note also that i have read that, for the first property, I need to prorate the interest (lets say for simplicity 50% was a primary and 50% was a rental), 50% of interest will go to Schedule E and 50% to Schedule A. So, this question is not about this either.

I want to check if the following understanding correct, with regards to the mortgage interest deduction of primary residence and the 750K limitation: Should i treat my situation as follows: For the first half of the year I had a loan of 350K related to my primary residence, and for the second half of the year, i had a loan of 650K related to my primary residence, and therefore i never went over the 750K limitation. In other words, the fact that the primary residence changed in mid-year does not result in "adding up the loan numbers" OR is IRS considering that i actually have indebtedness of 350+650 = 1M  and therefore, I am above the 750K limitation? 

Thank you!

[Cynthiad66]

Just make sure that the Loan Balance on the primary after refinance is $0 on 1/1/21.

[amanolak512]

Thanks for the reply, but I am not sure i understand fully the reply. I have 2 loans:

Loan1: Previous Primary -> Investment property mid-year

Loan2: New loan for primary house mid-year -> refinance

Are you saying that it is enough to say that my 2nd loan (for the new primary house) is 0? Can you explain why this is what IRS expects from me to write?

[Cynthiad66]

Yes  I agree that you should split the property converted to rental to 50% and claim half on Schedule E.  No  your loan on the 2nd loan is the balance and NOT $0.  Based on your description, your total mortgage in 2020 is right at $1million  Here is what you should do.

Since 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.