Refinanced and loan sold to another lender (two 1098s)

[runningfrog]

I've read many threads on the multiple 1098 issue/bug, but combining the two 1098s does not seem to work.

Home was purchased in August 2017 (>$1M)

Refinanced in 2020, then the loan was sold to another lender in 2021 after making one payment

Received two 1098s: lender A (2020 refinance) and lender B (sold to in 2021)

I tried to combine box1 from both 1098s to the most current 1098, and it seemed to work. But then I put the loan balance on Jan 1, 2022 (>$1M) and original loan date (Aug 2017), the mortgage interest disappears from my itemized deductions. Now, TT thinks taking the standard deduction is better and I owe a lot more taxes.

This seems like a simple and common situation as many people were refinancing in 2020 and 2021. Any thoughts or suggestions on how to get the correct mortgage interest deduction from the two 1098s in TT?

I'm using the web version (TT Premier). Thanks in advance for the help.

[DaveF1006]

This is because mortgage interest deductions are limited because of the amount of your mortgage balance. Since you put in an amount over $1M, all of your mortgage interest cannot be claimed. 

It sounds like you have combined both mortgage balances and this added up to the $1M total. Instead you may wish to calculate an average mortgage balance between the two 1098's and report that total instead. Also, since this is a refinance, you may wish to enter your mortgage balance of your home as of 01/01/2022.

Tell me if this helps.

[runningfrog]

sorry, this doesn't really help. maybe I need to clarify further.

yes, my mortgage is > $1M, but I should be able to deduct the interest of the mortgage up to $1M since the home was originally purchased in August 2017.

I combined the interest paid (Box1) for the two 1098s, not the mortgage balances. When TT asked for more info to support the mortgage interest deduction, that's where I put in the mortgage balance as of 1/1/2022 and that the original loan was taken out before Dec 15th, 2017. I think after this point, the mortgage interest was removed from the itemized deductions and my tax liability increased.

[RaifH · Accepted solution]

While your entire mortgage interest is not deductible, due to being over the $1 million limit for loans of that age, enough probably should be that you would qualify for itemizing your deductions. This is particularly true if you pay property taxes and have other itemized deductions. TurboTax only seems to carry the numbers to the worksheet if you answer in a particular manner, so be sure you follow these steps because not all of them will make sense:

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 both loans.
3. Answer the questions and enter the information from your Form 1098s:
   1. Box 1 Mortgage interest - Add the amounts together on both 1098s
   2. Box 2 Outstanding Mortgage Principal - Use the amount reported on your old loan
   3. Box 3 Mortgage Origination Date - Use the original purchase date back in 2017
   4. Boxes 5 & 6 - Use the combined totals form both 1098s
   5. Make sure Box 7 is checked
4. Answer What kind of property is this loan secured by?
5. Answer 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 in 2020)
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?
12. Enter the outstanding loan balance on January 1, 2022 in the first field. Leave the second field blank.

Pay particular attention to steps 3 and 11. This will calculate your deductible interest correctly based on the $1 million limit. Although not every answer is consistent with your loan, all the forms reported to the IRS will be accurate. 

[runningfrog]

I didn't have Box7 checked and in step 11, I had answered "Yes" because the original loan was Aug 2017. I changed that to No and it seems to be adding the mortgage interest deduction correctly now. Thank you!!