Jessica purchased a home on January 1, year 1 for $740,000 by making a down paym

Question

Jessica purchased a home on January 1, year 1 for $740,000 by making a down payment of $300,000 and financing the remaining $440,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2, Jessica made interest-only payments on this loan of $26,400 (each year). On July 1, year 1, when her home was worth $740,000 Jessica borrowed an additional $185,000 secured by the home at an interest rate of 8 percent. During year 1, she made interest-only payments on the second loan in the amount of $7,400. During year 2, she made interest only on the second loan in the amount of $14,800. What is the maximum amount of the $41,200 interest expense Jessica paid during year 2 may she deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard?

$0

$14,800.

$38,777

$8,400

$41,200.

Explanation / Answer

The maximum amount of interest that can be claimed as deuction is the interest on loan of $440000 @ 6% alongwith interest on loan of $185000 @ 8%.

Thus the amount of interest eligible for deduction is (26400+14800) $41200.

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