Calculating mortgage interest deduction after a refinance

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Topic Author
Jsdi7873hd
Posts: 55
Joined: Tue Sep 10, 2019 11:43 pm

Calculating mortgage interest deduction after a refinance

Post by Jsdi7873hd »

Hi all,

I've been searching the forums and found a couple of random posts (here and here) along with TurboTax, but am still pretty confused. Specifically, how do you calculate the average loan balance with a refinance?

Mortgage 1, from Jan 1, 2020 - August 15, 2020 - 800K balance
Mortgage 2, from Oct 1, 2020 - December 31, 2020 - 750K balance
Prepaid interest from refinance - August 15 - Oct 1, 2020

The problem seems to be, if you take the "average balance" as indicated by IRS pub 936, it makes it look like I have two loans (one with an average balance of 775K for mortgage 1 and another loan for an average of 748K for mortgage 2), which added together, becomes a ~1.5 mill loan and thus I can't deduct a lot. Turbotax seems to calculate the average balance this way, but the help page says this is incorrect and I'd lose a lot of mortgage interest deduction.

Others have said, calculate the percentage deductible for each mortgage independently, add those two together, and deduct everything. This seems to be happening if I follow the TurboTax help and set the ending balance to $0 on the first mortgage.

More digging has said, since this is technically a refinance on the same property, they treat it as a single mortgage and lump it all together with the beginning balance being the balance from mortgage 1 and the end balance being the balance from mortgage 2.

This shouldn't seem to be an edge case, but IRS pub 936 doesn't spell this out, or if it does, severely restricts the mortgage interest deduction due to a refinance. Does anyone know how to actually calculate the mortgage interest deduction with a refinance? Thanks!
niebeendend
Posts: 6
Joined: Sun Apr 24, 2016 4:09 pm

Re: Calculating mortgage interest deduction after a refinance

Post by niebeendend »

I am running into this same issue. I don't have an answer, but I am following along to see if anyone else does!
fabdog
Posts: 1569
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Calculating mortgage interest deduction after a refinance

Post by fabdog »

If you follow the directions further down in the Turbo Tax posts, that will allow you to enter both of the 1098's, and have TT realize that the first loan is now a zero balance, and the second on is now your current loan. These entries acknowledge TT can mess this up if you check the wrong boxes.

But your actual situation almost all of the interest should be deductible as you were only $50K over the limit for Jan-Aug and then at the limit the rest of the year.

The key is following the advice further down (not the top answer) to get TT to realize these are two separate loans on the same property...
The 1098's should have an Origination Date in Box 3 which should differentiate an Original Loan 1098 from a Refinanced Loan 1098,so the loan balances would not be added together. When entering your original loan 1098, DON'T indicate 'this loan has been refinanced' (even if it has).

When you enter your Refinanced Loan 1098, indicate YES this loan has been refinanced. You will then be able to indicate whether the entire loan amount was to 'buy, build or improve' your main home or you took CASH OUT in addition to refinancing the old loan (screenshot).
Mike
surfstar
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Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: Calculating mortgage interest deduction after a refinance

Post by surfstar »

Nevermind - I see you already referenced Pub 936, which should give you the $775k average to use.
Goal33
Posts: 1644
Joined: Sun Apr 12, 2015 12:30 pm

Re: Calculating mortgage interest deduction after a refinance

Post by Goal33 »

I am having the same issue. This is definitely a turbotax bug... I'll have to see if a patch is provided, otherwise will go with a different tax provider. Have used turbotax for over 10 years.
Goal33
Posts: 1644
Joined: Sun Apr 12, 2015 12:30 pm

Re: Calculating mortgage interest deduction after a refinance

Post by Goal33 »

fabdog wrote: Wed Jan 20, 2021 4:55 pm If you follow the directions further down in the Turbo Tax posts, that will allow you to enter both of the 1098's, and have TT realize that the first loan is now a zero balance, and the second on is now your current loan. These entries acknowledge TT can mess this up if you check the wrong boxes.

But your actual situation almost all of the interest should be deductible as you were only $50K over the limit for Jan-Aug and then at the limit the rest of the year.

The key is following the advice further down (not the top answer) to get TT to realize these are two separate loans on the same property...
The 1098's should have an Origination Date in Box 3 which should differentiate an Original Loan 1098 from a Refinanced Loan 1098,so the loan balances would not be added together. When entering your original loan 1098, DON'T indicate 'this loan has been refinanced' (even if it has).

When you enter your Refinanced Loan 1098, indicate YES this loan has been refinanced. You will then be able to indicate whether the entire loan amount was to 'buy, build or improve' your main home or you took CASH OUT in addition to refinancing the old loan (screenshot).
Mike
don't think so - still doesn't work.
Topic Author
Jsdi7873hd
Posts: 55
Joined: Tue Sep 10, 2019 11:43 pm

Re: Calculating mortgage interest deduction after a refinance

Post by Jsdi7873hd »

Thanks for the update here. I manually did pub 936 and talked to a CPA. I still think turbotax does it wrong, even if I say that the first loan wasn’t refinanced. I haven’t finished filing so I won’t see what exactly works, but I do see why putting $0 in box 2 for a 1098 works. It just makes the average in form 936 not change, and so you can deduct most of the interest.
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ray.james
Posts: 1430
Joined: Tue Jul 19, 2011 4:08 am

Re: Calculating mortgage interest deduction after a refinance

Post by ray.james »

I got to say, I envy turbotax now. In H&R block deluxe version, it only allows me to enter one field - Interest paid. In the instructions, we are supposed to calculate the allowed interest. There is not a single prompt to enter Box 2 value of 1098. The interest value entered will directly go to schedule A as deductible. Atleast turbotax does some calculations :D
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
somekevinguy
Posts: 170
Joined: Mon Jan 16, 2017 9:23 pm

Re: Calculating mortgage interest deduction after a refinance

Post by somekevinguy »

Curious if anyone has figured out a fix for this issue?
Goal33
Posts: 1644
Joined: Sun Apr 12, 2015 12:30 pm

Re: Calculating mortgage interest deduction after a refinance

Post by Goal33 »

somekevinguy wrote: Thu Feb 04, 2021 7:09 pm Curious if anyone has figured out a fix for this issue?
There’s no fix yet. I’m watching the TurboTax websites. A lot of people in same scenario. Seems like intuit is in denial, but I assume it’ll be sorted out eventually.
cchan05
Posts: 10
Joined: Sat Nov 25, 2017 8:43 pm

Re: Calculating mortgage interest deduction after a refinance

Post by cchan05 »

TurboTax's posted solution is to enter information from both the old and new 1098s as though they were a single loan.

I've done this, and this makes sense in the abstract, but I'd feel more confident about the result if I could back into the numbers myself. Specifically, I'd like to understand how I can figure out our average mortgage balance using the "monthly mortgage statement" method. Any tips for how to go about doing this? Specifically, how do we handle the month I refinanced, in which there are two overlapping balances?
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