Describe the tax treatment of the interest paid by cash-basis taxpayers in each

Q: Describe the tax treatment of the interest paid by cash-basis taxpayers in each

A cash basis taxpayer is a taxpayer who reports income and deductions in the year that they are actually paid or received.Cash basis taxpayers cannot report receivables as income, nor deduct promissory notes as payments.

ID: 2430246 • Letter: D

Question

Describe the tax treatment of the interest paid by cash-basis taxpayers in each of the following situations:

Taylor takes out a loan of $100,000 on February 15, 2014, and uses the proceeds to buy a residential building lot, which serves as security for the debt. On January 5, 2015, Taylor begins construction of a house on the lot. He completes construction on December 28, 2015 (having spent $300,000, excluding the lot), and moves into the house as his principal residence on New Years Eve of that year. On March 1, 2017, Taylor obtains a mortgage loan for $350,000, secured by the residence. The lender pays off the initial $100,000 debt and disburses the remaining $250,000 to Taylor.

Explanation / Answer

A cash basis taxpayer is a taxpayer who reports income and deductions in the year that they are actually paid or received.Cash basis taxpayers cannot report receivables as income, nor deduct promissory notes as payments.

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Describe the tax treatment of the interest paid by cash-basis taxpayers in each

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