Question

Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $30,000 home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year?

Answer 1

Margaret Lindley may deduct $13,000 for interest expense this year.

Step-by-step explanation:

To determine how much Margaret Lindley may deduct for interest expense, we need to consider the different types of interest she paid. The IRS allows deduction of three types of interest: home mortgage interest, home-equity loan interest, and investment interest. Credit card interest does not qualify for deduction.

1. Acquisition debt interest: Margaret paid $15,000 of interest on her $300,000 acquisition debt for her home. This qualifies for deduction.
2. Home-equity loan interest: Margaret paid $4,000 of interest on her $30,000 home-equity loan. This also qualifies for deduction.
3. Credit card interest: Margaret paid $1,000 of credit card interest. Credit card interest does not qualify for deduction.
4. Margin interest: Margaret paid $3,000 of margin interest for the purchase of stock. Investment interest is deductible, so she may deduct this amount.
5. Interest income: Margaret has $10,000 of interest income this year. This reduces the deductible interest expense.

To calculate the deductible interest, we subtract the interest income from the qualifying interest and take the smaller of the remaining balance or $750,000 (the limit for acquisition debt). In this case, the deductible interest would be $13,000 ($15,000 + $4,000 - $10,000).