Received 3 1098 forms and having an issue calculating the Mortgage Interest Deduction

[punkerlewis]

I sold my previous home (purchased in 2014) in 2022 and purchased a new home in 2022.  I received a 1098 for the home I sold, a 1098 from the original lender for my new home, and a 1098 from the current lender.  I entered the 1098 for my previous home (loan was less than $750,000) without an issue.  I entered the 1098 for the original lender for my new home (loan amount over $750,000), but it only contains the box 1 amount and box 3 date.  The lender that took over my current mortgage loan provided amounts in box 1, box 2, and dates in box 3 and box 11.  I entered all of the information, but it appears that turbotax is calculating the deduction by adding box 1 for the previous home and box 1 from the original lender for the new home, but only calculating the $750,000 limit for box 1 amount from the current lender.  I thought Turbotax would add the mortgage interest for my new home from the original lender and current lender and then apply the $750,000 limit?

[Cynthiad66]

The loan balance from the first home should be $0 because it was completely paid off during 2022.  Also, the loan balance for the new home original mortgage should be $0 as well.  The balance from the current lender should be used for computing deductible mortgage interest.

Since you have multiple 1098 mortgage forms from refinancing or your lender selling the loan, you’ll enter them one at a time.

After going through the steps with the first one, you can add a lender when you get to the Mortgage deduction summary screen.

But, if they're both from the same lender, and one of them has the “Corrected” checkbox marked at the top, enter the corrected 1098 and discard or shred the other one.

 

For a refinance

For a loan that was sold

[punkerlewis]

For the loan on the house I sold, Turbotax asked me to enter the total loan balance on 1/1/2023 OR the balance if paid off in 2022, so I entered the balance paid off and the date we settled the sale of the house. 

I did not refinance the loan on my new home; it was sold to a new bank, not the same bank and the corrected box is not checked on any of the 1098 forms.  All 3 lenders are listed on summary page.

For the original lender of the new home, TurboTax keeps flagging the $0 entry for the "outstanding loan balance on 1/1/2023. If you paid this off in 2022 enter the balance on the day you paid it off" on the summary page.  I also don't have a date listed for "Did you make your final payment? If you did not pay this off in 2022, leave this blank."

[DMarkM1]

TurboTax does not handle this situation; you must figure your mortgage interest deduction and enter it as an adjustment. First, I'll walk you through the steps to figure your mortgage interest deduction and then I'll give you the TurboTax entries to make.

Basically you have two mortgage debts.  One that was paid off in 2022 and another for a new home that has two servicing lenders.  The mortgage interest deduction limitation is figured by finding the average balance for the year of all your mortgage debt and then dividing your loan limit by that total.  This gives you a ratio that you apply to your total mortgage interest paid for the year to arrive at the deductible portion.  

Since you sold your first home and then purchased the second home you'll need to find average balance for each and add them together.  Add the first and last balance for each debt and divide by 2.  Then multiply by the number of months the loan was outstanding and divide by 12.

Use the amount in box 2 of your oldest 1098 and add the payoff amount and divide by 2.  Then, if the loan was outstanding for 6 months multiply by 6/12. 

For the second debt use the box 2 amount from the current 1098 and the ending balance (1 Jan 2023) of your current loan and divide by 2.  If that loan was outstanding for 3 months then multiply by 3/12.  Add those balances together to get your total average balance.  That is the average balance of all your mortgage debt for the year. 

You oldest loan was taken out prior to Dec 2017 so the loan limit on that loan is actually $1M or the average balance on that loan whichever is less, but not lower than $750K.  In your case it appears the loan limit will be $750K

You second mortgage taken out in 2022 has a loan limit of $750K.  Since your first debt is less than $750K your overall loan limit is $750K.  

Now divide 750K/average loan balance.  Multiply that ratio by the total of all the mortgage interest you paid from box 1 of your forms 1098.  The result is your deductible mortgage interest.

It is best to delete all the 1098s you have entered and start from scratch.  Start with the first loan (oldest) on the home that you sold.  Enter all the form information and be sure to select "Yes, this is the most recent form 1098" for this debt.

Next enter the 1098 for the first lender of your new home.  In this case answer "No, this is not the most recent 1098 for this debt." 

Finally enter the most current 1098 and answer, "Yes, this is the most recent 1098 for this debt."  Click "Done" and you will be asked additional questions about the payoffs.  

Enter the payoff amount for the oldest loan and the payoff date. Enter the ending balance for the current loan (1 Jan 2023) and do not enter a date.  

TurboTax will likely indicate your deduction is limited and give you the opportunity to enter your calculated amount.

Keep your calculations with your tax documents in case it ever comes up.  I'll let you know that no forms 1098 are submitted with your tax filing documents.  Your mortgage interest deduction is simply entered on your schedule A. The calculations and worksheets are kept by the taxpayer.  

@punkerlewis 

[edited:  3/30/2023 10:37am PDT]

[punkerlewis]

Thanks, DMarkM1.  This is very helpful, but I do have overlapping months, so I'm not sure how that skews these calculations.  I'll break everything down :

• New house purchased on 9/2 with loan from bank #2
• Old house sold on 10/20 and principal paid back to bank #1. 
• New house loan acquired by bank #3 on 11/1

1098 from Bank #1

Box #1 - $11,417

Box #2 - $433,745

Box #3 - 8/26/20 (It's worth mentioning 8/26 was a refinance (no cash out) from an original purchase in 2014).

1098 from Bank #2

Box #1 - $4,962.77

Box #3 - 9/2

1098 from Bank #3

Box #1 - $10,260.89

Box #2 - $1,332,000

Box #3 - 9/2

Box #11 - 11/1

[DMarkM1 · Accepted solution]

Yes.  Since you have overlapping months there will be a slight difference.  I am editing my earlier response as well.  Since the loans are less than a year they need to be annualized as below.  You'll just need to find the average balance for each debt separately and then add them together for the total average balance.  Below is an example.  Once you have the average loan balance just divide your 750K loan limit by that average balance to get your ratio.

Debt 1 - Box 2 amount for example 450,000 + pay off amount 445,000/2 = 447,500.  This loan was for 10 months so multiply by 10/12 to annualize.  The average balance for this debt is 372,916. Box 1 amount 5K.  

Debt 2 - Box 2 amount 1,500,000 for example + ending balance of most current 1098 (1,445,000)/2 = 1,472,500 This loan was outstanding for 3 months (Oct-Dec).  Multiply by 3/12 = 368,125.   Box 1 amount 10K

Add those together; 372,916 + 368,125 = 741,041 This is below 750K so all interest would be deductible.  The math would be 750000/741041 = 1.01  which is over 1.  

Deductible interest would be 10K + 5K = 15K (1) = 15K

[punkerlewis]

Thanks again!  This info is very helpful.