In year 1, Kris purchased a new home for $420,000 by making a down payment of $3
ID: 2437788 • Letter: I
Question
In year 1, Kris purchased a new home for $420,000 by making a down payment of $315,000 and financing the remaining $105,000 with a loan, secured by the residence, at 6 percent. As of January 1, year 4, the outstanding balance on the loan was $84,000. On January 1, year 4, when his home was worth $504,000, Kris refinanced the home by taking out a $252,000 mortgage at 5 percent. With the loan proceeds, he paid off the $84,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During year 4, he made interest only payments on the new loan of $12,600. What amount of the $12,600 interest expense on the new loan can Kris deduct in year 4 on the new mortgage as home related interest expense?
Multiple Choice
$12,600.
$9,200.
$1,050.
$7,350.
Explanation / Answer
Qualifying indebtness here is sum of acquisition indebtness (84000) + home equity indebtedness ($ 100000) = $ 184000. Therefore, qualifying interest will be propotionate of 184000/252000x12600 = $ 9200
Home equity indebtness is actually 504000-84000 = 420000 but since it cannot exceed $ 100000 we have taken it as that.
Please appreciate the efforts and give it a like. IT would be really helpful. thanks