Received CP28A and verified TurboTax didn't cap my mortgage interest - Owner occupied with partial rental

[moumourocks]

I received a CP28A.  I rent out a portion of my home (17% by square footage is an ADU with a separate entrance, bath and kitchen) and the mortgage is more than the cap (>$750k, closer to $1.1M and I'm in CA).  Since I rented out part of my home, TurboTax Desktop had me enter the Mortgage Interest in the rental section for Expenses.  It told me to entire the entire amount and then allocated the personal part in Schedule A and the rental expense portion in Schedule E.  It did not cap the personal part as the interest on the $750k on federal.

This appears to be an error in the TurboTax calculation.

What is the correct way to fix this when I amend?  If I adjust the mortgage interest paid down to for TurboTax to update/correct Schedule A, that will make Schedule E incorrect because it will be 17% of the lesser amount.  It will also make Schedule CA incorrect, because CA allows for deducting interest up to $1M, which the qualified portion of the mortgage principal is less than that.

[AmeliesUncle]

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@moumourocks wrote:

I rent out a portion of my home (17% by square footage is an ADU with a separate entrance, bath and kitchen)

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You don't rent out a portion of your home and not not an owner-occupied rental.  You are renting out a separate dwelling unit/apartment.  Treat it as a completely separate rental.

For any costs that are shared by both your home and the rental, enter 17% (or whatever is appropriate) of those expenses for the rental.  Then for your personal itemized deductions, you'll enter that 83% on Schedule A.  Does that make sense?

[moumourocks]

Thank you, that matches what I did. My concern is that TurboTax seems to have calculated it incorrectly, and I need guidance on how to amend.

TurboTax had me enter the full mortgage interest in the rental section, then allocated 17% to Schedule E (rental) and 83% to Schedule A (personal). However, it did not apply the $750k federal mortgage interest cap to the personal portion, which is why I received a CP28A notice.

What’s the correct way to fix this when amending? If I reduce the mortgage interest amount so TurboTax recalculates Schedule A correctly, then Schedule E will be wrong because it will use 17% of the reduced amount. It will also throw off Schedule CA, since California allows interest up to $1M and my qualified mortgage principal is under that limit.

[AmeliesUncle]

Re-read my original response.  Do NOT say it was an owner occupied rental.  Only enter 17% in the rental section.  Enter the other 83% in the mortgage/itemized deduction section. 

[moumourocks]

I want to clarify my situation. In TurboTax Desktop, I correctly indicated the property is a multi-unit (duplex) with 17% rental use. TurboTax instructed me to enter the full mortgage interest under the rental section, stating it would allocate the personal portion to Schedule A automatically.

TurboTax did allocate 17% to Schedule E and 83% to Schedule A, but it did not apply the $750,000 federal mortgage interest cap to the personal portion. That’s why I received a CP28A notice.

My question: What is the correct way to amend? If I reduce the mortgage interest amount so TurboTax recalculates Schedule A correctly, Schedule E will be wrong because it will use 17% of the reduced amount. It will also misstate Schedule CA, since California allows interest up to $1M and my qualified mortgage principal is under that limit.

How should I handle this so that:

• Schedule E shows the correct rental interest (17% of the full amount),
• Schedule A reflects the capped amount for federal purposes,
• Schedule CA reflects the full amount allowed under California law?

[AmeliesUncle]

As I said before, treat it as a separate rental property.  Say it is 100% rental use.  Then enter 17% of the expenses.  As a completely separate thing, go to the personal mortgage interest and enter it as 83%.