Home Mortgage Interest Deduction

If you have more than one 1098 form, I will recommend you to combine all 1098 forms and enter as one. I am attaching a TurboTax link for the instructions.  Click here:

Multiple Form 1098s

For tax years prior to 2018, your mortgage interest deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status). Beginning in 2018, this limit is lowered to $750,000.  For more information about the mortgage interest deductions, click here: Mortgage Interest deduction

This really needs to be fixed by TT.  I'm very disappointed.

I've spent over 2 hours now trying to figure out the correct way to enter 3x 1098s:

- paid interest up to April on my old house.  Sold that one in April (1098 from 1 lender)

- bought a new place in April (1098 from 2nd lender)

- refinanced in December 2020 (1098 from 3rd lender)

There is ZERO help I can find on how to enter 2x 1098 for a house sold and one purchased.  If I enter the box 2 amount from both 1098s (old and new property) it restricts the interest deduction as it thinks the total mortgage was >750k.  If I enter zero, I get an error message (zero value not allowed).

How in Charlie heck do I enter this correctly ?!

Gonna post this question separately...hope someone replies

I, too, am having issues with the deductible home mortgage interest.  I am limited because mortgage debt is over $750k.   At this point, TT is calculating the correct limited amount of home mortgage interest, but does not carry the amount over to the Schedule A.  Also, it does not include the "Deductible Home Mortgage Interest Worksheet" with the printed return.  I can override the amount on Schedule A, but I get a warning that there is an error and cannot be E-filed.  It seems that the solution is on the "tax and interest worksheet" where it asks of "Does your mortgage interest need to be limited?"  "yes" box and "no" box.  Even though TT calculated the limited amount of intersest, the "no" box is calculated and checked.   The "no" box cannot be overridden or deleted, nor can the "yes" box be checked or overridden.  I have spoke to 9 different TT support staff and it seems to me that I am the only preparer that is having this problem.  HELP!

You are not the only preparer having this problem.  There is a known problem with Home Mortgage Deduction.  TurboTax is working to fix the problem and the many other issues. There are many changes due to the CARES Act that require software upgrades.  We have not been given an  expected date for the fix yet.  Please check back often to see if you can file your return.

OR

In the meantime, you can try this work around.  You did not provide the details of your Mortgage situation and therefore I am giving you a general work around that might help.  Please try this.

If there is a refi and there was an outstanding mortgage principal listed in both of them on Line 2 on the 1098. When you do put an outstanding balance in both forms, then the program adds them together and if that number is greater than $750k, then it puts you in the category to "limit interest". To get that to go away, you need to go back to the deductions section and click on "edit" mortgage interest statement. Change the line 2 of the mortgage that you no longer owe on (like the one that you refinanced and paid off) to a 0 (zero) because you have refinanced out of that loan and no longer have an "outstanding mortgage principal". Once you change one of them to zero (the one that was paid off by the refinance) then it should no longer pop up with that error at the end when you go to file. 

Thank you for your encouragement that there is a light at the end of the tunnel.  I was beginning to think that I was going to have to buy new software to get a correct tax return.  As for the specifics, I have two mortgages.  The same mortgages as last year.  No refinances.  One is prior to Dec, 2017.  The other is May, 2018.  The average balance is over $1M combined.  At first TT was allowing all interest.  Then after a major update, TT calculated the limited mortgage interest allowed, but did not carry it to the Schedule A.  Overriding the allowable amount only caused errors and did not produce the "Deductible Home Mortgage Interest Worksheet" as evidence to "Keep for your records".  Once again, thank you.  Fingers crossed that this is remedied soon.

Cynthia,

Just updated TT with what seemed to be a big update.  It must not include a solution to the problem with limited mortgage interest deduction.  It made no difference to my issue.  As I see it, the problem is that I know the amount of the limited interest but I cannot select "yes" to the question asked on the "tax and interest worksheet" that mortgage interest is limited. It is a calculated box and and cannot override either the "yes" or "no".  I tried deleting and re-entering as I was advised by one of the many TT support staff that I spoke with over the last month.  Is there another update coming?

Yes.  These have been work arounds to help you file.  There is still an issue that is outstanding.  IRS is working on worksheet updates for the Home Mortgage deduction.  Once they release the final version, TurboTax can program them into the TurboTax software.  You can just wait until the FIX is complete as stated in my earlier message.

Any news on this problem, short of overriding the amount of deductible mortgage interest on the Schedule A?  This still generates an error when I run smart check.  It also does not produce a Schedule A worksheet to indicate where and how that deductible amount of mortgage interest was calculated.  Please let whomever is in charge of this problem know of its existence.  Cannot get the refund any too soon!!!  crolann

I ended up creating a spreadsheet to replicate the worksheet in Table 1 of IRS Publication 936 (2020).  I also used the spreadsheet to evaluate the different methods for reporting the average balance as outlined in 936.  This resulted in a larger deduction than using the outstanding mortgage principal reported by my banks on the 1098 form.  The banks provided the balance at the beginning of the year on line 2 of the 1098 form.

I then multiplied the interest paid to each bank by the fraction in line 14 of the Table 1 worksheet to get the allowed interest deduction for each institution.  I also multiplied the average balance for each bank by the same fraction in line 14.  These were then the inputs into Turbo Tax.  Turbo Tax accepted this inputs without difficulty.  The debt totaled $750,000 so there were no hiccups.

I'm using Turbotax and it will not let me put 0 for line 2 of the mortgage I paid off.

This workaround did not work when I tried it.  Our situation - 3 1098s:  A refi in which we took out a new mortgage slightly larger than 750k AND took some cash out when we refied; we also paid off a home equity line (a decent % of which was for expenses other than home improvements.  Trying to combine the 1098s resulted in Turbotax kicking us out of itemizing deductions and saying we should take the Standard Deduction. 

What worked?  Going into the interest worksheet form for our original mortgage (home mortgage interest worksheet) and clicking on the box in Line 9 that said we refied/paid off loan/sold property (you click on this box if any of those applied); ditto for the worksheet for our home equity loan.  Until I did that, Turbotax was allowing us to deduct only about 55% of our mortgage interest.  Checking the box in the individual mortgage interest worksheets kicked that percentage up to roughly 75% and the numbers in the Schedule A Home Mortgage Interest Worksheet listing all 3 of the loans connected to this refi (old mortgage, old HELOC, new mortgage) are logical. 

People have complained in other posts that the problem was adding up all of your various mortgages -- if you go into the actual IRS forms, you'll see that that is exactly what is supposed to happen.  The issue is making sure that the individual mortgage worksheet(s) indicate which loan or loans is/are paid off.  I am still not sure that this is the correct solution but the numbers now make sense at least.

We have used Turbotax for years and this is the first year we've ever had any issues with the software.  Good luck to all.

When is this going to be fixed?  Everything on Lines 1 to 8 on my worksheet for my Home Equity Loan appears to be correct but Line 9 is blank.  What does this mean?  Is this an error in TurboTax or does it mean 100% of my interest is tax deductible?

If the funds were used 100% toward your home and you indicated this in your return, 100% of your interest is deductible.

I checked the box on the worksheet that not all the funds were spent to maintain the house, and the amount of qualified funds was reduced by this amount on the worksheet.

Sounds correct.  Cash out loans are treated differently.

Example:  

So you will need to calculate the amount that is strictly related to buying, building or substantially improving your home.  The interest on any portion that was used for any other reason is not tax deductible. 

Example of how to calculate this number is below. 

If you refinanced your home in 2003, with a balance on your mortgage of $225,000 and took out $75,000 to pay off debt. Your new balance was $300,000. The $225,000 is your original home purchase amount,  the $75,000 is not so that interest is not deductible. Your original home purchase price is now 75% of the mortgage balance.

If you refinance again a month later before making any payments (for easy math sake) and take out $400,000, of which you use $100,000 to buy a boat, you would only count 56% of the balance as your original home loan balance. (225,000/400,000=.5625) So with no other refinancing, your current loan balance is $300,000, you would only be able to deduct interest on 56.25% of the balance or $168,700 (300,000x .5625)

Now, if you used the $100,000 to build an addition onto your house instead of buying a boat with it, this would be counted as substantially improving your home, therefore the amount that would now have deductible interest would be 81.25% ((225,000+100,0000/400,000=.8125) In this situation, you would be able to deduct the interest on 81.25% of your current balance if there was no further financing. 

Thanks for your thorough example.  But my situation on my home equity loan is not that complicated.  Here are the numbers from the Line F 10/14/87 - 12/15/17 column of the Home Mortgage Interest Smart Worksheet.  Interest paid in 2020 is available on the 1098 from the bank, which I did enter.  So my questions are why Line 1 was not filled in by Turbotax and why Line 9 was not calculated?  Or, if I was supposed to provide this information, why did I not get an error message?  I did check No on Line C.