Deductible Home Mortgage Interest Worksheet 2020 - Error Avg Balance

[GSD77]

OLDER POST By ME

Box 1.  Add up all of mortgage intersest paid on mortgages.  So add up amounts on all 1098 forms.  

Box 2. Enter outstanding mortgage balance at beginning of year 1/1/2020 TT test to make sure not over $750,000 generally, if over $750,000 your interest deduction may be limited  If over $750,000 need to calculate an average balance outstanding use IRS instructions.

Box 3. Date of original mortgage ordination date on property, that is, date of first loan on property.  Has to due with $750,000 limitation or perhaps $1,000,000.  See instructions.

Box 10 on 1098 or yourReal Estates tax bill:  Add up all real estate taxes paid and enter in Property (real state) taxes paid box. On TT interest screen or enter through next TT window “Property Taxes”

so basically add up  both interest paid and real estate taxes paid and enter as one 1098 in TT.  I personally named the Mortgage Lender as a combined name (e.g. caitbank and Wells Fargo mortgages.

Post again if more questions.  If below $750,000 TT should accept and enter the combined interest and real estate taxes paid as full deductible and transfer to Schedule A

[GSD77]

Little math looks like TT is counting 4 loans at 360000 each.  750000 principal limit divided by 4 loans at 360000(1,440,000) equals 750,000 divided by 1,440,000 or 52.1%.  52.1% of 13,904 interest is 7243 which

is close to TT allowable amount which calculated wrong

[NCperson]

@GSD77 - while I haven't run though how TT is doing this, for simplicity combine mortgages where the loan was simply transferred to another servicer. How many mortgages do you then have? 

the 'average loan balance' is the interest on THAT mortgage divided by its interest rate.  So that if you paid off a mortgage during the year or originated one,  the result will weight for that.  A two point average will skew results. 

https://www.irs.gov/pub/irs-pdf/p936.pdf 

see page 13 at the middle top.  

[GSD77]

Agree you can calculate average balance for each of CourageousSTORM ‘s  four loans, three of which paid off in refinancings, but TT calculation is their issue as it is showing a limitation on mortgage interest because it’s adding principal balance of each loan and imposing a percentage limitation as thinks loan balance is approximately 1.4 million.  CourageousSTORM said balance only 360,000 at any point in time so 100% should be decurible.  Have to trick TT; has been problem in 2019 and 2020 for TY.  Combining into ‘one loan’ is fix TR posted on one help screen.  Thanks for your comment  

[42Amy1]

@GSD77 

On re-reading several of your messages I keep seeing you say to enter the origination date of the first, original loan on the property.  In a lot of cases, people with this Mortgage Interest Deduction issue refinanced a loan (original loan) which itself was a refinance of a previous loan.  In my case that loan refinanced by another in 2020 itself originated in Nov. 2017. (Had it originated a month later it would have been under the $750k limitation instead of $1M limit on deductibility.)

So, isn't the origination date of the loan refinanced in 2020 the  date that should be entered as all other numbers entered pertain to that loan regardless whether it was the original purchase loan? (My purchase was in 2013, refinanced 2015 then in 2017 and finally in 2020.  I really don't want to open that can of worms. 

[NCperson]

xx

[42Amy1]

Thank you for you answer.  @GSD77 

Clarification: the loan refinanced in 2020 was $930k

I think this is correct:

the Loan Refinanced ($930k) in 2020 with a larger one ($1.1M including cash-out for improvements)

$930k loan originated Nov 2017, so $1M limit applies to its balance of 930k which is grandfathered over as the portion of the new loan, ($1.1M) that is deductible?

 (930,000/1,100,000) x  total interest =  deductible interest

I'm going to forget about the $20k already spent in 24 months prior as the entire additional cash-out is intended for improvements anyway.  

Does this sound correct?

Must I still calculate the Avg monthly principal balance per Pub 936 as well or will TT do it?

Thank you in advance

[GSD77]

First, I think the 930,000 / 1,100,000 seems correct under the 1,000,000 grandfather provision on loan originated before December 16, 2017.

I doubt TT calculations are sophisticated enough to find the nuance of the 930,000/1,110,000 as TT doesn't even handle refinancing correctly.  

I would calculate 930/1100 percentage of interest paid manually and compare to what TT says.  If different I would enter the 930/1100  time interest paid as override.  If IRS questions you have calculations and intent to enter accurately.  

I suspect TT will ask beginning balnce and then ending balance and will be aggressive and calculate interest deductible and 1,000,000/1,100,000 and calculate deduction from there.  TT won't recognize 930,000 nuance.   

[GSD77]

@42Amy1 I would use the 2017 date when loan was at highest point and within the $1,000,000 grandfather amount.  TT looks for a date before 12/16/2017 to determine $1,000,000 grandfather amount.  Earlier dates lower $ of loan The unlimited loan principal grandfather period is in 1987, I believe, and therefore doesn't apply. 

[GSD77]

Use November 2017 date to get $1,000,000 loan principal benefit.

Calculate using 930,000 / 1,110,000 formula as stated earlier.

[42Amy1]

@GSD77 Just off the cuff then 930/1100 = 0.85

The deductible portion of the interest paid after refinance is 85%, and before the refinance is 100%.

Still working my way through Pub 936 on calculating Avg. Balances though...  I suppose since the Avg. Balance will be lower than 1,1m, that method might yield a higher deduction

Thanks again

[GSD77]

Misread.  I believe you can deduct 100% of interest on 930K loan before refinance date and then 930.000 / average loan outstanding after refinance.  When I did it for daughter used actual days as it mattered on combined calculation of two homes (new and vacant being sold), but I think you can do a couple of ways ending balance (each month) divided by number of months or interest paid divided by interest rate adjust for number of months outstanding.  [(interest paid divided by interest rate) / (months of new loan)] times 12.

And you are right average will be a little less so will yield higher deduction

[42Amy1]

Thank you so much @GSD77   At around 3am last night I FINALLY figured out the mixed mortgage and Table I and at the end also came up with the portion of mixed Interest that I could deduct, just as you said.

For Table I, (mixed mortgage) use line 2 for line 12 (the amount of qualified interest allowed/refinanced by Loan 2 (mixed loan) - from Loan 1 Home Acquisition Debt. (line 2)

Divide Line 12 by Avg monthly balance of entire mixed loan = a fraction, in my case, 0.850

ex. 0.85 x Interest paid on mixed mortgage (Loan 2)*

= DEDUCTIBLE portion of the mixed mtg Interest

Now, I will see whether I can input this into TT and get the correct amount. Sigh...

*in my case as we refinanced in 2020

Note: 100% of my Loan 1 interest is deductible

[GSD77]

Sitting here trying to fool TT.

Loan 1 - Put in 2017 date, $0 loan balance and interest paid on Loan 1.

Loan 2 - put in 2017 date again and then put in your calculated average as 1/1/20 balance and then again as ending so TTT calculates interest deduction using your average.  

Haven’t looked to see if simpler override where you can enter an average principal.

Just tried and have to enter $1 as outstanding on Loan 1 or TT won’t accept, but that still leaves the 930,000 versus 1,100,000 problem which I couldn’t find a quick TT fix.  So best thought is go to Deductible Home  Mortgage Interest Worksheet Part 2 Line 16 and right click, click Override, and enter your calculated deductible interest 100% of Loan 1 and ~85% of Loan 2 as a total.   This will transfer correct amount to Schedule A.  Keep your worksheets to present to IRS if any questions.  Remember you are trying to fool TT and you are giving correct amount to IRS.

Overridedid not create an error on Federal review.

[GSD77]

Reread your post, you can probably use your current Home Mortgage Interest deduction worksheet (in Forms view) and just override Part 2, Line 16 to accomplish entering the accurate interest deduction.  Less mess, less stress and won’t need to change your good work that you did last night.