Wrong Deduction Amount regarding 2 1098s from buying & selling house

[halerinard]

I'm using the Mac Premier version.

In 2021, I bought a primary residence, and few months later sold my previous primary house. New mortgage principal exceeds $750k limit, and old mortgage didn't exceed $750k limit.

Turbotax seems to wrongly added the two principles and calculated a very low value of deduction on mortgage interests, and them recommended me with Standard Deduction (which is weird, because last year I was using Itemized Deduction, and it should be getting at least same deductions this year because other situations don't change much).

If I understand the tax law correctly, I should be getting all mortgage interest deductible from the old loan, and also up to $750k's new loan's interest deductible.

I tried to enter the outstanding principal of the old loan as 0 in the form (I didn't allow me to enter $0, so I entered $1, but I found it weird that I have to do this), but I still don't think it works properly. Please help me correct this and let me know how I can work around it. Thanks!

[halerinard]

I played with the forms a little bit. It seems no matter how I indicate the dates of old and new loan, the app seems to just take total principal of two loans, total mortgage interest of two loans, and calculate the part of $750k (like total interest * $750k / total principal), without considering the dates and how the buy and sell happens.

[RaifH · Accepted solution]

The mortgage interest limit is calculated based on your average mortgage balance for the entire year, not individually to each loan. In this situation, you will want to calculate the average monthly balance for each loan and report that as your outstanding mortgage principal. You can do this by taking the Outstanding Mortgage Principal reported in Box 2, multiplying it by the number of months you carried the loan, and dividing that number by 12. Do this for both loans and report the calculated number as the Outstanding Mortgage Principal:

1. In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
2. Answer the questions and enter the information from your Form 1098s. Use the calculated amount for Outstanding Mortgage Principal. For Box 3, Mortgage Origination Date, use the original purchase date even if the Form is for a refinance.
3. Answer What kind of property is this loan secured by?
4. Answer Yes or No to  We didn't pay any points.
5. Answer Yes to Let's see if this is the most recent form for this loan.
6. Answer Is this the original loan used to buy your property? 
7. Answer Is this loan a HELOC or a refinance? if it is not the original loan
8. Answer Did you take cash out? if this loan is a refinance or HELOC
9. Once you have entered both and are back in the Home loan deduction summary screen, click Done.
10. Answer NO to Do either of these apply to this loan? Answer No even if it does apply, by using the mortgage origin date of the original purchase back in step 3, TurboTax will correctly apply the proper mortgage limit on your home acquisition debt. 
11. Enter the calculated outstanding loan balance again for the amount on January 1, 2022 in the first field. Leave the second field blank. 

TurboTax calculates the average balance by taking the average of the outstanding mortgage principal on Form 1098 and your balance due on January 1, 2022. By reporting your calculated average balance for both, it will apply the mortgage limit based on that amount. 

[y2chen]

Thanks for the pointers about directly calculating the mortgage balance based on number of months.

I'm in a similar situation with the new home mortgage exceeding the $750k mortgage principal limit. But my new home had the purchase mortgage, which was sold to a servicer, and then I refinanced, so there are three 1098s. I'm at a bit of a loss as to how to proceed with them all. Do I just combine them all into one? Combine the first two (purchase/sold) into one? Calculate the principal the same way for all three?

[RaifH]

Generally, yes, you can report all three 1098s onto one form. If you did not take cash out when you refinanced and did not pay any points on the original loan, then reporting them all on one form is the easiest way to report it:

1. In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
2. Edit your existing 1098. You should only have one that contains all three Form 1098s. (If you have a separate 1098 for a different home, report that one separately)
3. Answer the questions and enter the information from your Form 1098s:
   1. Box 1 Mortgage interest - Add the amounts together from all three 1098s
   2. Box 2 Outstanding Mortgage Principal - Use the amount reported on your original 1098
   3. Box 3 Mortgage Origination Date - Use the original purchase date
   4. Boxes 5 & 6 - Use the combined totals from all 1098s
   5. Make sure Box 7 is checked
4. Answer What kind of property is this loan secured by?
5. Answer Yes or No to  We didn't pay any points.
6. Answer Yes to Let's see if this is the most recent form for this loan.
7. Answer No to Is this the original loan used to buy your property? 
8. Answer Yes to Is this loan a HELOC or a refinance? 
9. Answer No to Did you take cash out? (assuming you did not take cash out when you refinanced)
10. Once you are back in the Home loan deduction summary screen, click Done.
11. Answer No to Do either of these apply to this loan? TurboTax will correctly apply the proper mortgage limit on your home acquisition debt. 
12. Enter the outstanding loan balance on January 1, 2022 in the first field. Leave the second field blank. You should be able to get the January 1 balance by checking statements from your new loan provider.

If you bought this home in 2021 and did not have the loan for all 12 months, you will have more deductible interest if you use the average monthly balance as in my first post and report that as your Outstanding Mortgage Prinicipal in Box 2. If you do that, you would use the amount you calculated again in Step 12 as the loan balance on January 1, 2022. 

@y2chen

[y2chen]

Hi @RaifH, thanks for all the responses to these questions. In another thread on this topic, you gave different advice. Specifically to say No to "Is the 1098 you’re working on now the most recent for your loan?" for the home that was sold in 2021. Following that, if I enter the new home purchase loan and refinance separately (with both principle values >$750k), I end up with an average that's higher than the method you outlined above.  Which is the correct way to enter this info?

[RaifH]

Previously, TurboTax was using all loans to calculate the mortgage limit. Now, it only uses the mortgage principal of currently outstanding loans. 

The other thread had to do with a sale of an old home and a purchase of a new one. In that case, I wouldn't combine the two 1098s. In the one above, since it is all for the same home, you can combine them into one 1098. You no longer have to do this to get the mortgage interest to calculate correctly. Now you can answer No for your original purchase and Yes for the refinance to the most recent question and it should calculate correctly. TurboTax uses the average of the first month reported as the mortgage principal on your outstanding loan and of the last month which is the balance you report on January 1, 2022. 

You can still combine them. The difference should be minimal, unless you made any major principal payments during the year or took cash out with the refinance. In either of those cases, or if you purchased points with the refinance, I would report them separately. 

@y2chen