Why adding a secondary home 1098 lower my total mortgage interest deduction

[archlichking]

I have bought a second house in 2021, and I lived in my primary house for 9 months and in my secondary house for 3 months in 2021.

My primary loan is less than the $750000 cap, and its total mortgage interest through 2021 is less than $25000, so all the mortgage interest of my primary house is considered tax deductible on turbotax home and business 2021.

When I input my secondary mortgage, the overall loan amount is up to $2000000, which is way more than $750000, then my overall mortgage interest is less than the tax deductible from only counting primary. It turns out how turbotax calculates the mortgage interest deduction is

deduction = (750000/total loan amount)*25000 

Is this the correct way or it is a bug in turbotax. 

[JillS56]

No, that is not correct.   You can only claim interest paid on up to $750,000 of Outstanding Mortgage Principal. In other words, the maximum eligible principal amount of a mortgage(s) is $750,000.  Once your total Outstanding Mortgage Principal hits $750,000 the amount of interest you can deduct is limited.   

Here is an article that gives some information on IRS Publication 936

[deag]

In turbotax 2021 home and business the mortgage interest deduction greatly decreases (from $13000 deductible to $7500 for example. it's less than the number from only putting my primary home) if I put my second house. 

[JillS56]

The total mortgage interest deduction will drastically drop when you have to limit the amount of deductible interest due to reaching the $750,000 mortgage limit.   There is no way to get around this.   You can only claim interest on up to $750,000 of mortgage principal.   No matter how you look at it or how much you are losing, that is all you can take.   

To determine the amount of interest divide the maximum debt limit by your mortgage balance, then multiply the result by the interest paid to figure your deduction.  You indicated that your total mortgage amount is $2,000,000.   Dividing the $750,000/$2,000,000 gives you .375.   Multiply this by the amount of interest that is deductible.   If your total interest is $13,000 then the amount deductible ($13,000 x. 375 = 4,875)  I am not sure if these are the actual numbers in your case, but they are the numbers I picked out from your question.   

[bjohlson]

Same thing happened to me. Almost exact same scenario as the original posters.

The second mortgage (which is much larger) results in a much lower "limitation percentage" on the Turbo Tax Deductible Home Mortgage Interest Worksheet and thus reduces my overall deduction. In other words, it would be better not to file the second mortgage. Must be a glitch in the Turbo Tax software.

[MonikaK1]

Did you purchase a second residence, refinance an original loan, or take out a home equity loan in addition to a first mortgage?  You can revisit the Mortgage Interest questionnaires for both loans to confirm whether all of the questions were answered correctly and whether a limitation was applied.

It is important to identify the loans correctly in order for TurboTax to determine whether to apply the limitation for total mortgage debt of $750,000.

Deductible mortgage interest is interest you pay on a loan, secured by a main home or second home, that was used to buy, build, or substantially improve the home. For tax years prior to 2018, the maximum amount of debt eligible for the deduction was $1 million. Beginning in 2018, the maximum amount of debt is limited to $750,000. Mortgages that existed as of December 15, 2017, will continue to receive the same tax treatment as under the old rules. Additionally, for tax years prior to 2018, the interest paid on up to $100,000 of home equity debt was also deductible raising the previous total to $1,100,000. Loans with deductible interest typically include:

• A mortgage to buy or build your home
• A second mortgage
• A line of credit
• A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn't deductible. Your home mortgage must be secured by your main home or a second home. You can't deduct interest on a mortgage for a third home, a fourth home, etc.

See this TurboTax tips article and this help article for more information.