In early 2017, we purchased our house with two loans that totaled over $750,000 but less than $1,000,000. All the interest from those loans was deductible, even after the TCJA changes that lowered the limit to $750,000, since the loan was from before December 2017. TurboTax correctly allowed that full deduction in 2017, 2018, and 2019.
In November 2020 we refinanced the remaining balances, which remained over $750,000, rolling both loans into a single new loan, taking out cash to cover the refi closing costs. We paid ~$2000 in points on the refi.
My understanding of how all this would be treated:
- All interest paid in 2020 on the original loans used to purchase the house in 2017 would be deductible.
- The points on the refi will be deductible over the 30 year life of the refinanced loan.
- The interest will be deductible on the refi up to the amount of the original loans that the refi paid off (even over $750,000 - for the first 27 years, then that would fall to just $750,000, but not a concern because the balance will be far less than that by then). This would be calculated using the IRS's instructions in publication 936. (TurboTax tries to calculate that for you, but I can't tell if the calculation is correct due to issues explained below.) So for 2020 it would be something like $2,000 deductible out of $2,100 in total interest paid on that 1098.
In any case, for 2020 the amount of interest on the refi is small compared to what we paid on the original loan (only for one month and at a much lower interest rate). When I enter the 1098 forms from the original two loans everything is fine - the expected large deduction of all the interest appears. But when I add the 1098 from the refi, TurboTax decides that about half the interest we paid on the original loans is no longer deductible. My tax owed increases by thousands of dollars, and I can't figure out how to get TurboTax to fix it.
Have I misunderstood that tax laws regarding the effect of the refinance on the deductibility of interest already paid in 2020, or is TurboTax messing this up? Or both?
After some more forum surfing, it appears another thread describes the problem in more detail and that TurboTax does not correctly calculate average or total balances when you have multiple 1098s after a refinance:
If this isn't fixed in the next few weeks I'll be using a different service to file, even if I have to re-enter all my information.
@marko6 I found the same issue. I spoke with a specialist who recommended using the desktop version but the same issue persists but allowed for easy diagnosis of the software problem.
The software sums the "avg loan balances" of the original and the refinanced loan, resulting in Turbo tax calculating your "avg load balance" as 2x your actual mortgage -- or at least in my instance it is 2x. Example, a $1 million dollar mortgage refinanced for $1 million is treated as a $2 million mortgage, resulting in only deductions for half or less of your actual interest paid.
Sounds like the person helping you didn't really know what they are talking about. The guidance on this hasn't changed in 2 years. For 2018 and 2019 Turbotax referred you to an IRS worksheet to calculate your liability here, which while I scratched my head as to why I'm paying Turbotax if I'm doing this on my own, you knew you were getting the right number. For 2020 they put in this oversimplified and broken calculation.
Not very reassuring that it "may" get resolved before tax season. Does that mean I need to make alternate plans to file my taxes? Or that I need to ask the IRS for an extension because Turbotax is broken? This seems to be a major bug that needs to get fixed quickly.
Agreed my assessment is the same as yours. The IRS instructions are clear, but the interpretation of those instructions within the software are over simplified resulting in refinanced mortgages being treated the same as a second mortgage, making this a software problem.
The rep committed to issuing a refund if the problem it is not resolved. They also said most of the updates would happen before Feb 12th.
If 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.
I've already set the original outstanding balance to zero and it still results in an incorrect calculation of the deduction. I'm not sure whether I will receive an error trying to file, because the error is large enough that I have no intention of filing through the software until it is resolved.
Some TurboTax customers are experiencing an issue with their Home Mortgage Average Balance. This can cause in the the Home Mortgage Interest to be incorrectly limited. This is especially true if you have more than one 1098-T to report in your return.
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