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pb5712
Level 2

How to apply mortgage interest deduction limits for second home?

I entered two 1098s, one for primary home (acquired before Dec 2017), one for second home (bought after Dec 2017).

 

TurboTax seems to apply the deduction limits (1M & 750k) to each 1098 individually and concludes all interest (on a total balance > 1M) is deductible.

My understanding is one should apply a limit to the total balance outstanding on both homes. But somehow, because each property falls on difference sides of the Dec 2017 rules change, TurboTax seems to apply the limits separately, allowing me to deduct interest up to 1M+750k=1.75M. (if I change the dates on either mortgage the behavior in TurboTax changes and either the 1M or 750k limit is applied).

How to enter this correctly in TurboTax?

 

(I.e. using Table 1 of Part II of Pub 936)

7 Replies
MarilynG1
Expert Alumni

How to apply mortgage interest deduction limits for second home?

Some TurboTax customers were experiencing an issue with their Home Mortgage Average Balance. This can cause the Home Mortgage Interest to be incorrectly limited.

 

Click this link for more info on Workaround for Limited Home Mortgage Interest

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pb5712
Level 2

How to apply mortgage interest deduction limits for second home?

That workaround only describes how to handle multiple 1098s related to a refinance. Not other scenarios where interest deduction needs to be limited.

gloriah5200
Expert Alumni

How to apply mortgage interest deduction limits for second home?

box 7 and box 8 on the 1098 could make a difference as far as applying all the 1098 to the same property.  The ones not for the principal residence would not have box 7 marked and would not apply toward the principal residence

 

Unless

 

The principal residence is the property that is securing the mortgage for both properties.  Then you legitimately may not be entitled to deduct all mortgage interest against the same property.

 

Please verify what the box 7 and 8 for all 1098's is showing for the property secured by all mortgages...

 

If the principal residence is the property securing both properties then it probably should be limited.

 

Please refer to IRS Publication 936 for additional information.

pb5712
Level 2

How to apply mortgage interest deduction limits for second home?

Pub 936 defines 3 categories:

1) before 1987

2) before Dec 16, 2017 and under 1M

3) after Dec 16 2017 and under 750k

 

Pub 936 says if all mortgages fall in one or more of the above categories during the entire year, then all mortgage interest is deductible. It also says the deduction limits for category (2) and (3) should be applied to the combined mortgages on your main home and second home.

 

Pub 936 does not explicitly state what happens when primary and second home fall in separate categories; i.e. (2) and (3).

 

Turbotax behavior seems to be:

- first and second home before Dec 16, 2017: deduct up to 1M

- first and second home after Dec 16, 2017: deduct up to 750k

- one home before, one after Dec 16, 2017: deduct up to 1M + 750k = 1.75M

 

The latter seems to be in line with the text in Part I of Pub 936, but does not match calculations in Part II of Pub 936. 

JamesG1
Expert Alumni

How to apply mortgage interest deduction limits for second home?

I fear that you are not being given the full deduction for home mortgage interest.  Has it been limited?  Please clarify.

 

I have not compared my calculations specifically to IRS Pub 936, but in TurboTax Online Deluxe, I was able to enter a home loan on an IRS form 1098 and the second IRS form 1098 for the refinanced loan.  For the refinanced loan, I used the balance of the loan at the time of loan pay-off. 

 

I was given the full mortgage interest deduction and the Home Mortgage Interest Limitation Worksheet did not add the two mortgage balances together.

 

The entries were made at Federal / Deductions & Credits / Mortgage Interest (Form 1098).

 

Entries for the original loan

 

Do any of these uncommon situations, I entered None of these apply.

Did you pay points, I entered I’ve already deducted.

Was this loan paid off or refinanced, I entered Yes.

Is this loan a home equity, I entered No, this is the original loan.

 

Entries for the second loan

 

Do any of these uncommon situations, I entered None of these apply.

Did you pay points, I entered I didn’t pay points.

Was this loan paid off or refinanced, I entered No.

Is this loan a home equity, I entered Yes, this is a loan I’ve refinanced.

So what type of loan is it? I entered A mortgage loan that I’ve refinanced.

Have you ever pulled cash? I entered No.

 

Hope this is helpful.

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pb5712
Level 2

How to apply mortgage interest deduction limits for second home?

As clarified before, this question is *not* about a refinance, but how to apply the mortgage interest deduction limits to a primary home + second home.

JohnB5677
Expert Alumni

How to apply mortgage interest deduction limits for second home?

If you have two properties with two different 1098's you should post them separately.  

 

There is also an annual limit on the amount of mortgage interest you can deduct. The interest limitation isn’t based on a fixed number; rather, the maximum interest you can deduct is that which accrues on up to $1 million of outstanding principal loan balances.

 

This $1 million restriction applies to the combined total of loan balances on both of your homes – not just the mortgage balance on the second home. Moreover, this maximum mortgage balance only applies to funds you borrow that are used to buy, construct or make improvements to your home and that were obtained after Oct. 13, 1987.

 

If any of your outstanding mortgage balances were used for other purposes, you may still be able to deduct them, but only as home equity loan interest.

 

 

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