One of your friends from high school, Steve Einerson, calls you on April 10, 201
ID: 2329284 • Letter: O
Question
One of your friends from high school, Steve Einerson, calls you on April 10, 2019 and indicates he has a tax question (that you will certainly know off the top of your head). He indicates the following as background information.
On January 2, 2018, he borrowed $80,000 from Wells Fargo on a “home equity loan” – a loan where the bank placed a second mortgage on Steve’s home for security on the $80,000 loan.
Steve’s $80,000 loan is a three-year balloon note with interest due and payable at the end of each calendar quarter. All principal will be due and payable on December 31, 2020. Wells Fargo is charging Steve an annual interest rate of 6.75% on the loan.
Steve took the $80,000 of home mortgage proceeds and purchased a boat – he got a steal on the boat since it was January and the seller was desperate to dispose of his boat.
Home Equity Loan Interest
Steve wants to know if the interest he has paid on the loan during 2018 (a total of $5,400) is fully deductible. You tell him that it is deductible generally but you know there are some limitations and before giving him a definitive answer, you want to look up the rules. You tell him you will get back with him shortly.
You perform the necessary research and determine what Steve can and cannot deduct.
Explanation / Answer
Deductible mortgage interest is any interest that some one pay on a loan secured on qualified home. The interest paid on upt $ 100,000 of home equity debt is deductible. Loan includes a home equity loan. If the loan is not secured debt on home , then it will be considered as personal loan and the interest paid is usually not deductible.
For IRS, qualified home includes house, condominium, mobile home, boat, recreational vehicle etc.
Up to two times of mortgage, interest can be deductable.Morethan that may not be deductable.
In this case Steve purchased the boat but seller is desperate to dispose off . Since Steve aquaired boat which is a qualified home as per IRS.
Steve can claim $ 5400 interest expenses as deduction.
Issues with seller to dispose off asset may be dealt in court of law. As per IRS Steve Aquaired another home with the loan of main home.
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