Sold first home and bought second home same year

[bolanosm]

I bought a new home ($650k mortgage) april 24, 2020 and sold my condo may 27, 2020 (originally purchased in 2015 with a mortgage of $330k). This seems like a common situation but I cannot find an example anywhere on how to deduct the mortgage interest.

[DaveF1006]

It depends. Enter the full amount of your mortgage balance for your new home on that 1098 and enter 0 for the mortgage balance of your condo. List the mortgage interest for both 1098's as it is listed on the form. Enter these 1098's in the following manner.

1. Log in or open Turbo Tax
2. Go to federal>deductions and credits>you and your home>show more
3. Mortgage Interest and Refinancing (Form 1098)>start

[jtax]

The IRS publication about home mortgage deduction limits is Publication 936: https://www.irs.gov/publications/p936

See in particular the section on limits at: https://www.irs.gov/publications/p936#en_US_2020_publink1000230022

Assuming that you didn't rent out the condo, you should enter both mortgage info (1098s) in the TT interview. TT has help links for two cases that you should read up on. 1) total outstanding mortgages > $750k and 2) multiple 1098's because of a sale/purchase. The later seems to cover your case. 

If you still have questions ask again.

From the help:

What if I had a mortgage larger than $750,000 at any time during 2020 with the sale of a home?

Mortgage interest is limited once your loan exceeds $750,000 for a home purchased in 2020. Your old home may qualify up to a $1,000,000 limit if the home debt originated before December 16, 2017. The $1,000,000 limit is based on when the debt originated and funds were used to buy, build or improve the home. (refer to IRS Publication 936 for details)

We will walk you through how to do this. Follow these steps.

Input each 1098 separately with the following modifications:

1. Mortgage Interest Received (Box 1) - manually adjust the interest to reflect the interest limit (see step below)
2. Outstanding Mortgage Principal (Box 2) - Enter $0 for Outstanding Mortgage Principal

Manually Calculating Interest:

1. Calculate the average loan size for the old and new home
Find the balance of each loan at the beginning of the year and at the end (either the end of the year or end of the loan)

Beginning Balances -The beginning balance of each loan is on the 1098 on Box 2- Outstanding Mortgage Principal.

Ending Balances- Ending balances would be the payoff amount on your old home (payoff statement or escrow statement) and on the ending balance on the new home would be found on the January 2021 Mortgage Statement.

Average for each loan would be=
(Beginning balance + Ending Balance)/2

2. Calculate the portion of the interest paid that is deductible depending on when your home was purchased as follows:

Home Bought/Debt originating before December 16, 2017= $1,000,000/ Average Loan amount

Home Bought/Debt originating after December 16, 2017= $750,000/ Average Loan amount

Calculate the deductible amount of Interest-Take the percentage and times that by the actual interest paid as reflected on the 1098. Enter this amount in Mortgage Interest Received (Box 1).

If you are under the maximum loan limit on a home do not take more than 100% of interest on the 1098.
Example-Over the Loan Limit in the Sale and Purchase Home

Old Home- on January 1, 2020 the old home had mortgage debt of $1,200,000. When the home was sold the amount outstanding on the loan was $1,100,000 and interest and the total interest paid on it in 202 was $36,000.
New home - Mortgage of $1,000,000 with $10,000 of interest paid. The new loan balance was at $950,000 at the end of the year.

Old Home

Calculate the average balance - (1,200,000 +1,100,000)/2= $1,150,000

Calculate the percentage to deduct- 1,000,000/ Old Home Average of $1,150,000 =.87

Calculate the deductible amount of Interest to Deduct-Interest Paid of $36,000 *.87 = $31,320 (Report on Box 1 on the 1098)

New Home
Calculate the average balance ($1,000,000 + $950,000) /2 =$975,000

Calculate the percentage to deduct- $750,000/ $975,000=.77

Calculate the deductible amount of Interest-Interest paid on new home of $10,000 x .77 = $7,700 (Report on Box 1 of the Second 1098)
Box 2. Outstanding Mortgage Principal - enter $0
Enter the values from the rest of the boxes as you normally would.
Total Amount of Interest Deducted on your Tax Return =$39,020

Example - Over the Loan Limit on Just One Home

Old Home- on January 1, 2020 the old home had mortgage debt of $600,000. When the home was sold the amount outstanding on the loan was $575,000 and interest and the total interest paid on it in 202 was $18,000.

New home - Mortgage of $800,000 with $10,000 of interest paid. The new loan balance was at $775,000 at the end of the year.

Old Home

Calculate the average balance - ($600,000+$575,000)/2 = $587,500

Calculate the percentage to deduct -1,000,000/ Old Home Average of $587,500 = 1 (do not go over 1 or 100%)

Calculate the deductible amount of Interest - $18,000 * 1 = $18,000 (Report on Box 1 on the 1098)

Deductible Interest =$18,000 (Enter for Interest on Box 1 on 1098 for new home)

New Home- $750,000 limit

Calculate the average balance - ($800,000+$775,000)/2 = $787,500

Calculate the percentage to deduct -750,000/ Old Home Average of $787,500 = .95 (do not go over 1 or 100%)

Calculate the deductible amount of Interest - $10,000 *.95 = $9,500 (Report on Box 1 on the 1098)

Deductible Interest =$9,500 (Enter for Interest on Box 1 on 1098 for new home)

Box 2- Make sure you enter $0 on each 1098.

Total Amount of Interest Deducted on your Tax Return =$27,500