TurboTax Incorrectly Applying Qualified Loan Limit and Reducing Deductible Mortgage Interest for My Second Home?

[Geoff_S]

TurboTax's Your mortgage interest is being limited page in the step-by-step under Personal >> Deductions & Credits of the 2024 Home & Business Edition indicates "It's not common, but we could be missing details that would let you claim additional mortgage interest, for instance, you own a second home or you bought and sold a home in the same year."  I believe that is the case for my situation, as described below, and would greatly appreciate feedback from the community, and guidance on how I should override the TurboTax calculation (if appropriate).

My family has two Qualified Homes including a Main Home that is our primary residence and a Second Home that we do NOT rent out.

We took out a mortgage on our Main Home after Oct 13, 1987, and prior to Dec 16, 2017.  The average balance of the mortgage on our Main Home in 2024 was $467,292.  The interest for the mortgage on our Main Home reported on form 1098 in 2024 was $12,281.

We took out a mortgage on our Second Home after Dec 15, 2017.  The average balance of the mortgage on our Second Home in 2024 was $629,087.  The interest for this mortgage reported on form 1098 in 2024 was $27,860.

Each mortgages was entirely Home Acquisition Debt used to buy the two respective homes, and each are secured by their respective home.

TurboTax is applying a qualified loan limit of $750,000 to both loans and calculating a limitation percentage of 68.4% (i.e. $750,000 divided by combined total loan amount of $1,096,379).  It is then pro-rating our $40,141 in total combined interest by 68.4% to arrive at $27,456 in deductible home mortgage interest.  It is precluding the remaining $12,685 as nondeductible mortgage interest.

Is the above TurboTax calculation correct?  Shouldn't the full $12,281 in mortgage interest on our Main Home be deductible since the average mortgage balance was $467,292 in 2024 (i.e. below the $1,000,000 limit for mortgages taken out after Oct 13, 1987, and prior to Dec 16, 2017)?  And shouldn't the full $27,860 in mortgage interest on our Second Home be deductible since the average monthly balance was $629,087 in 2024 (i.e. below the $750,000 limit for mortgages taken out after Dec 15, 2017)?

[NCperson]

@Geoff_S run through the worksheet on page 11

https://www.irs.gov/pub/irs-pdf/p936.pdf

you will find that the TT calculations are correct 

[LindaS5247 · Accepted solution]

Yes, based on the information you provided above, it appears that the TurboTax calculation is correct.

Your mortgage interest for both of your homes (based on the limited information provided above) would be calculated as follows: 

• The mortgage limitation percentage would be .684 or 750000/1,096,379.  
• So for example if your total mortgage interest was interest was $40,141 it would be reduced as follows:  $40,141 x .684 =$27,456.  
• Your deductible interest would be $27,456.

Keep in mind: The mortgage interest deduction limits are not applied separately to each loan. If you use the house as a second home, interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home.

You can review how your mortgage interest was limited on the worksheet: Deductible Home Mortgage Interest Worksheet.

If you are using TurboTax Desktop, you can review this worksheet as follows:

1. Click on "Forms" in the upper right corner of your TurboTax screen to switch to "Forms Mode"
2. In your left panel scroll down to "Ded Home Mort"
3. Your mortgage interest limitation calculation is in Part 3 

Your TurboTax screen will look something like this:

Click here for Publication 936 (2024), Home Mortgage Interest Deduction

Click here for Deducting Mortgage Interest FAQs

Click here for Instructions for Schedule A (2024)

[Geoff_S]

Thank you @LindaS5247 for the detailed and thoughtful reply.  So am I understanding correctly that the $1,000,000 limit of our pre-Dec 16, 2017 loan, and the associated interest deduction benefits thereof, were undercut/eliminated when we took out a separate mortgage on a separate home after Dec 15, 2017?

I'm not tracking why we wouldn't at least get to fully deduct the interest on the mortgage for our Main Home (pre-Dec 16, 2017 subject to $1,000,000 limit) even if we were required to pro-rate the deduction for the interest on our Second Home (post-Dec 15, 2017 subject to $750,000 limit).  Instead, the worksheet appears to be lumping both loans into the post-Dec 15, 2017 category that is subject to the $750,000 limit and ignoring the higher $1,000,000 limit for the pre-Dec 15, 2017 mortgage on our Main Home?

[NCperson]

@Geoff_S - if you are tracking the worksheet, the reason it works that way is that is the way Congress passed the law.  I am not sure there is a way to otherwise answer your question.  

if you took out acquisition debt post 2017, you are limited to $750,000 of such debt.  It's the way the law was passed. 

[----]

Is there a way to do this override in TurboTax online?

[zomboo · Accepted solution]

Pub 936 and Turbo Tax applies what's called the Simplified method where the average balances of both mortgages are added together and subjected to a limit. If one of your loans is pre-2017 and one is post-2017, the limit will be the greater of the pre-2017 balance and $750K up to a maximum of $1M. Since your pre-2017 balance is less than $750K, your limit is $750K on the combined balance of both loans.

You are getting at what is called the Exact method. This is where you take each loan individually in the order of origination and apply it's limit. If you use this method, the limit for your pre-2017 mortgage is equal to the pre-2017 average balance up to $1M ($467,292) and all of the interest is deductible ($12,281). It's determining the limit for the post-2017 mortgage that's throwing you off. Ordinarily, the limit for the post-2017 mortgage would be $750K if that was the only mortgage you had. Now you have to reduce the $750K limit by the limit amount applied to the pre-2017 mortgage ($750,000 - $467292 = $282,708). The interest deductible on the post-2017 mortgage is $282,708 / $629,087 * $27,860 = $12,509. Adding the two together: $12,281 + $12,509 = $24,790.

Looks like your better off going with the $27K you're getting with Turbo Tax using the simplified method.