Home mortgage worksheet appears incorrect

Forum|Forum|6 years ago
February 27, 2020
28 replies
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Has anyone ever tried to use the mortgage worksheet? The calculations appear wrong. If you enter new mortgage principal (say, from a refi), and indicate that some of the money went towards buying, building, or improving an existing house, and some of the money did not, the program calculates a PERCENTAGE of the "qualified interest" which is deductible. However, this is NOT correct. See Publication 936, "mixed mortgages" or the IRS regulations. There is an ORDER in which mortgage interest must be deducted with mixed mortgage. The first type of interest would be home equity interest, that is, ANY interest from principal NOT used to buy, build, or improve. That includes things like buying a car, or even closing costs for the refi. (The closing costs were not used to build, buy, or improve the house. They were used typically to get you a better rate.) In other words, until you get rid of the home equity debt, you have a zero amount deduction on Schedule A. But the program does not do it that way.

ProSeries Basic

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Best answer by cinmon428

I read the Publication over carefully, and I acknowledge I was wrong. The percentage method is the correct method.

T

TaxGuyBill

@cinmon428 wrote:
There is an ORDER in which mortgage interest must be deducted with mixed mortgage. ... In other words, until you get rid of the home equity debt, you have a zero amount deduction on Schedule A. But the program does not do it that way.

No. There is an "order" to how the PRINCIPAL payments are applied. The deductible interest is correctly based on the percentage of the average principal amounts.

C

cinmon428Author

Level 6

From Publication 936:

A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt).
Complete lines 1, 2, and 7 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt (determined by the date the debt was acquired) in your mixed-use mortgage. Don’t use the methods described earlier in this section to figure the average balance of either category. Instead, for each category, use the following method.
Figure the balance of that category of debt for each month. This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order.
First, any home equity debt not used to buy, build, or substantially improve the home.
Next, any grandfathered debt.
Finally, any home acquisition debt.
Add together the monthly balances figured for b and c in (1).

If the principal payments are applied to home equity debt first (which is not deductible), how do you come up with your percentage result? Can you cite a reference for this?

C

cinmon428Author

Level 6

If principal payments are applied in an order, then interest payments must relate to that order as well. I can’t see a different set of rules for interest. All principal reductions are for home equity debt first. That must mean all payments for that principal which are for interest must be for the same home equity debt. That’s simple logic.