How to handle multiple 1098 due to buying a new home

[callussun]

Hi,

I lived in my previous home for 8 months and in a new home for 4 months. I converted my old home to a rental after moving out and I have mortgages for both.

The old home mortgage balance is < $750k but my new home mortgage balance is > $1MM.

If I enter the 2 forms as they are, TurboTax combines the 2 forms as if they are for the same house and I get much less deduction due to the $750k limit for Federal mortgage deduction limitation and the $1MM California State mortgage deduction limitation.

How do I enter the two 1098 forms so that TurboTax will be able to calculate the correct taxes? 

[RaifH]

You will want to report the average balance for both homes for the mortgage interest deduction to calculate correctly. Your mortgage deduction will be limited if the average balance exceeds $750,000 for the year. When you converted the old home to a rental, you should take the four months of property taxes, points, mortgage insurance premiums, and mortgage interest as an expense to offset your rental income. You only want to use the unused portions to calculate your personal deduction. 

For the remaining eight months that you can use as a personal deduction, you will want to calculate the average monthly balance by taking the Outstanding Mortgage Principal, multiplying it by the number of months you used the home for personal use, and dividing by 12. Report the calculated amount as the Box 2 Outstanding mortgage principal. 

You will want to do the same for your new home. If you only had the mortgage on the new home for 4 months, you would take the mortgage principal reported and divide it by 3, since you only had it a third of the year. 

Once you enter both, TurboTax will ask follow-up questions.  Answer No to Do either of these apply to this loan? Answer No even if it does apply to your older loan. Enter the amount you calculated above for the outstanding loan balance on January 1, 2022. Leave the date paid off field blank.

Going forward, Form 1098 for your old home will be reported in its entirety in the rental section of your return. 

[callussun]

I don't think this makes a difference though. I still end up paying more taxes when entering 2 loans compared to a single loan. Maybe I should check "No" for "Let's see if this is the most recent form for this loan"?

[RaifH]

No, do not respond No to that question for either loan. If you answer no, TurboTax will still be expecting a Form 1098 that is the most recent for that loan which will cause a miscalculation of the average balance. In your situation, you will want to calculate the average monthly balance for each loan and report that as your outstanding mortgage principal as outlined above. Once you have done that for both loans, you can report it in TurboTax by following these steps:

1. In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
2. Answer the questions and enter the information from your Form 1098s. Use the calculated amount for Outstanding Mortgage Principal. For Box 3, Mortgage Origination Date, use the original purchase date even if the Form is for a refinance.
3. Answer What kind of property is this loan secured by? Enter the old 1098 as your secondary home and the new one as your primary home.
4. Answer Yes or No to  We didn't pay any points.
5. Answer Yes to Let's see if this is the most recent form for this loan.
6. Answer Is this the original loan used to buy your property? 
7. Answer Is this loan a HELOC or a refinance? if it is not the original loan
8. Answer Did you take cash out? if this loan is a refinance or HELOC
9. Once you have entered both and are back in the Home loan deduction summary screen, click Done.
10. Answer NO to Do either of these apply to this loan? Answer No even if it does apply, by using the mortgage origin date of the original purchase back in step 3, TurboTax will correctly apply the proper mortgage limit on your home acquisition debt. 
11. Enter the calculated outstanding loan balance again for the amount on January 1, 2022 in the first field. Leave the second field blank. 

TurboTax calculates the average balance by taking the average of the outstanding mortgage principal on Form 1098 and your balance due on January 1, 2022. By reporting your calculated average balance for both, it will apply the mortgage limit based on that amount. 

Entering your second loan may actually make your deductible interest decrease. This depends on your outstanding balances and the interest rate you are paying. While that could be because something was entered incorrectly, it could also be true if you enter the higher interest rate loan first. 

[Anonymous]

Thank you!

This method worked perfectly for me. I also manually did the worksheet myself using the instructions from publication 936, calculating the average mortgage balance using several of the methods they suggest (which is exactly what you also said) and I got the same deduction in Turbotax using your method.

In my case, I sold a home in 2021 that had a mortgage from 2016 with a balance over $1,000,000, and then purchased another home in 2021 that had a mortgage over $750,000. Thus the complications start.