Mortgage (>750k limit) + heloc (mixed-use?) + heloc refinance - TT capitulates

[andmat]

Hi community,

here's my case: I have my mortgage originated in 2021 with >750K balance as of 12/31/2022. I also had a heloc in 2022 used to buy the same primary property 2021. That heloc was refinanced with another heloc in 2022. I'm scratching my head on computing interest deduction, and TT seems to get that wrong (though it does make a reservation that it does not handle cases like that correctly). I see 3 approaches
1. conservative - ignore both HELOCs as the primary mortgage exceeds 750k and use the average balance approach for the primary mortgage

2. follow the mixed-use mortgage approach from 936 and do the following
  1. calculate monthly principle values for each of 3 loans 

  2. sum them all up and divide by 12 - that's my average balance

  3. divide 750K by the average balance and multiply that by the sum of all paid interests to get the deductible part.

3. consider both helocs and the primary mortgage the same class home acquisition debt (not mixed use mortgage) due to no cash out. Then I have 3 ways to calculate the average as per 936. I'll go with average balances and get the beginning of the year as Primary Mortgage + Heloc 1 and end of the year as Primary Mortgage + Heloc 2

Which approach makes more sense to you? The difference I get is a few thousand $ because interest rate on heloc is much higher.

thanks!

[DMarkM1 · Accepted solution]

Yes, option 3 is the correct option in your scenario.  Since the HELOCs were used the buy, build or improve the home that secures the loan, it is home acquisition debt not mixed-use.  As you mention you then have options to figure your average balance.  

The method you suggest (main and HELOC 1 for beginning balance plus main and HELOC 2 for ending balance) will work great.  Your qualified loan limit is $750K so divide that by your average balance to get the percentage of deductible interest.  

[andmat]

Apparently, TT calculates interest deduction differently. Here's what it does:
1. calculates average balance of the primary mortgage + HELOC2,
2. divides 750k by that number and multiplies that by the interest from primary + HELOC2.

3. adds the entire unadjusted interest of HELOC1

Since TT does not adjust the balance of HELOC1, the overall interest tax deduction is higher, which makes me very suspicious as it contradicts 936 and common sense.

I spent hours talking to different TT experts and none was able to explain the logic and rationalize why we can deduct unadjusted interest from HELOC1, which was refinanced.

One expert even filed the support ticket on my behalf, which returned as 'calculation is correct', which makes me thing that Intuit is not looking into edge cases.