Hi All -
I think there may be some ideas getting conflated here, but I do believe the mortgage interest limitation worksheet is incorrect (both in TurboTax and the IRS provided worksheet in the publication). As an FYI, I am a tax attorney (but M&A, so I am not well versed with individual taxes, but I do read and interpret tax law all day). Also, I stayed at a Holiday Inn last night, so I got that going for me.
Internal Revenue Code Section 163(h) says that, generally speaking, interest is tax deductible on acquisition indebtedness up to interest attributable to $1M in loan principal. This applies to home loans from 1987 to 2017 (assuming you are a calendar year taxpayer). For loans taken out after December 31, 2017, this limit/cap is reduced to $750k in principal. See Section 163(h)(3)(F)(II). More importantly, see Section 163(h)(3)(F)(III), which I have directly pasted below (fuscia font is my clarifying commentary; bold, underline, etc. for emphasis:(
- (III)Treatment of indebtedness incurred on or before December 15, 2017
- Subclause (II) (which imposes the $750k limit) shall not apply to any indebtedness incurred on or before December 15, 2017, and, in applying such subclause to any indebtedness incurred after such date (apply the 750k limit to post-2017 debt), the $750k limitation under such subclause shall be reduced (but not below zero) by the amount of any indebtedness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of this subsection for the taxable year.
I interpret the above to say two critical things:
- The $750k limit does not apply to acquisition indebtedness incurred prior to December 15, 2017, period.
- When applying the $750k limit to post-2017 acquisition indebtedness for which is interest is being claimed in that tax year, the $750k limit is reduced by the average principal of acquisition indebtedness for which interest is deducted for pre-2018 acquisition indebtedness. This conceptually makes sense because say you have pre-2018 acquisition indebtedness in excess of $1M, you should be able to deduct this interest up to the $1M principal limit. However, this would also reduce your $750k limit to zero, so if you had post-2017 indebtedness in the same tax year (say because you sold a house in 2021 that you bought in 2015 and you bought another, new house in 2021), you would not be able to deduct this interest in 2021 as your post-2017 acquisition indebtedness limit would be zero. This seems like a correct result as you are not deducting any interest in excess of the original $1M principal cap for pre-2018 acquisition indebtedness, and you aren't double dipping by deducting more interest attributable to the post-2017 acquisition indebtedness.
The IRS worksheet and TurboTax are combining the pre-2018 and post-2017 acquisition indebtedness and applying the 750k limit. This to me is incorrect based on the tax law as written. As noted above, it clearly states the $750k limit should not be applied to pre-2018 acquisition indebtedness, full stop. So for people who have both kinds of acquisition indebtedness in a single tax year (likely because they sold an old house and bought a new one), interest attributable to the pre-2018 acquisition indebtedness should be tax deductible up to the $1M principal cap, and to the extent that interest is deducted, the 750k limit applicable to post-2017 acquisition indebtedness should be reduced by the principal of the pre-2018 acquisition indebtedness that interest was deducted for.
For my fact pattern (sold a house with pre-2018 loan in 2021, bought a new house a week later with a 2021 loan), this is incorrect tax treatment and haircutting my allowable mortgage interest deductions substantially. I am not sure of a solution in the software, but presumably I will need to hardcode a number in somewhere.
Sincerely welcome any feedback/solutions here.
TurboTax needs to fix this as this is certainly a bust in my eyes.
Thanks.
