Selling and buying a home in the same year mortgage interest deductions

[cathcr]

I sold a condo which had approx $450k in mortgage debt left in June 2021. That number is now down to zero. That same month, I bought a house with approx $720k in mortgage debt. I am married. The tax code says you can deduct mortgage interest on the first $750k of indebtedness. I would think because I did not have both mortgages simultaneously, I could deduct all of my mortgage interest from both mortgages, since neither mortgage was above the $750k and neither house was as "second home" and they were both my "primary home"? Or can only deduct the interest from the condo (which I know longer own)  and the interest up to 300k indebtedness of my new house? It is very much not clear on TurboTax.

[RaifH · Accepted solution]

You are correct, the IRS allows for mortgage interest to be deductible on the first $750,000 of mortgage for your primary and secondary residences. Since the outstanding mortgage balance reported on your 1098s would yield a total amount above $750,000, you can use the average mortgage balance prescribed by the IRS. According to the IRS, for any month the loan was not secured by your home, you would use 0. So if you sold your condo in June, your outstanding mortgage was approximately $450,000 for January through June and $0 for July through December. The average would be $225,000. You can find the exact amounts on your monthly mortgage statements.

Likewise for the new home. If you acquired it in June, your balance would be $0 for January through May and approximately $720,000 for June through December for an average outstanding balance of $420,000. 

You can calculate the exact average balance for each loan and use that as the outstanding mortgage balance. Document your number using your monthly mortgage payments. Once you enter the average balance into TurboTax, you will be beneath the IRS threshold of $750,000 and your entire mortgage interest will be deductible. 

[al104]

How do you enter a beginning balance for a mortgage purchased towards the end of the year? Turbotax left the beginning balance blank for my 2nd house mortgage so it calculated my average balance as the entire amount for the year when it was only for 1 month of the year.

1st house purchased 3/21/17 and sold 12/8/21 : paid $13,500 of interest (loan amount for that year $422k) so based on your answer, I should be able to deduct all of this right?

Paid off 12/8/21

Moved to house purchased 12/1/21: paid $2,500 of interest (loan amount for $1.1m) , I would expect to only be able to deduct 750,000/1,100,000 = 68% of this.

But what turbotax did was calculate the average for the first house as ($422k+0)/2 = $211k

Then added the entire amount of the 2nd house mortgage $1.1m to that amount = $1.3m

And calculated my deductible interest as 750k/1.3m = 58% of all the interest I paid ($16k) = $9,280

Which is less that what I paid for the 1st house that was under IRS limits.

This seems very wrong, and what you replied makes a lot more sense, but I cannot seem to adjust my average balance for the 2nd house to be less than the full mortgage amount of $1.1m, even thought it was only for 1 month of the year.

I would appreciate if you can please help. Thank you

[LeonardS]

Form 1098 is an informational form used to prepare your tax return.  The IRS allows you to use the Average Mortgage Balance in determining your mortgage interest deductibility.  Enter only one 1098 using your average mortgage balance and the total of any deductible items on both 1098 forms.  This will put your mortgage balance below 750K for 2021 allowing you to take up to 10K in mortgage interest deduction.

[playsummuzik]

very lame that TT doesn't cover this situation easily... 

[elijahhw]

Exactly. This has to be the most common use-case, to sell and buy a house and fall into the 750k rule. 

[BT1135]

I agree, with all the homes that are bought and sold in the current realestate market, how is this an "Uncommon Situation"!

[BT1135]

I understand how to get the average but how do you actual applied these changes to Turbotax? Is it as simple as changing the value in box 2 "outstanding mortgage principle"?

[PatriciaV]

Since TurboTax does not handle the mortgage interest deduction limitation in a year that a home is bought and another home is sold when one or both mortgage balances are over the limit, you need to complete the calculation of allowable interest yourself and enter an adjusted interest amount when prompted. Be sure you keep these calculations with your other tax documents in case you need to document the interest deduction.

The necessary calculations are outlined in IRS Pub 936, Table 1. The lines referred to below come from Table 1.

Publication 936 provides several methods to calculate/determine your average loan balance for a loan.

Once you have calculated the average loan balances for each loan separately (lines 2 and 7), add the averages together for the total average loan balance (B) (line 12).

Divide your loan limit (line 11) by the total average loan balance (line 12) to get a ratio (A/B) (line 14).  That ratio is multiplied by the total amount of interest paid (line 13) as shown on your Forms 1098 to arrive at the deductible portion (line 15).

When your mortgage interest is being limited, TurboTax displays this message and provides an "Adjustment" box for you to enter your calculated interest deduction. See a screenshot of this page below.

@BT1135