Check my work 9 Required information Part 1 of 2 [The following information appl
ID: 2520582 • Letter: C
Question
Check my work 9 Required information Part 1 of 2 [The following information applies to the questions displayed below.] Javier and Anita Sanchez purchased a home on January 1 of year 1 for $500,000 by paying $50,000 down and borrowing the remaining $450,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) Skipped eBook a. Assume the Sanchezes also took out a second loan (on the same day as the first loan) secured by the home for $80,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. The Sanchezes make interest-only payments on the loan in year 1. What is the maximum amount of their deductible interest expense (on both loans combined) in year 1? Print Maximum deductible interest expenseExplanation / Answer
Ans:
Ans is $35,755, using the average interest expense method.
The first loan of $450,000 is classified as acquisition in debtedness. The second loan of $80,000 is classified as a home-equity indebtednes. The amount of home-equity indebtednes is limited to the lesser of (1) the fair market value of the qualified residence in exces of the acquisition debt related to tha residence and (2) $100,000 ($50,000 for married filing separately).The Sanchezes home is worth $500,000 ($50,000 down payment plus the $450,000 acquisition indebtednes).Hence the home-equity indebtednes is limited to $50,000 which is the lesser of(1) FMV of residence less acquisition debt ($500,000 - $450,000) = $50,000 or(2) the amount of home-equity indebtednes or $100,000Because the total debt secured by the home exceeds the total qualifying debt, the Sanchezes can use the chronological order of method or the average interest method to determine the total deductible interest.
Under the chronological methods, the Sanchezes could deduct $4,000 on the second loan ($50,000 × 8%) and $31,500 on the first loan for a total of $35,500 interest expense.
Under the average interest method the Sanchezes may deduct $35,755 of interest in total value computed as follow $37,900 total interest × $500,000/$530,000 = $35,755.Consequently the average interest method allows them to deduct more interest in total.b.$35,500 consisting of $4,000 on the second loan and $31,500 on the acquisition loan. In this case, the Sanchezes are able to deduct all of the interest on both loans because the actual home-equity loan ($50,000) does not exceed the home-equity indebtednes limitcalculated above ($50,000).