Question

Jenny and Jerry have a home with a fair market value of $625,000. They borrowed $400,000 ten years ago to purchase the home (home value at that time was $450,000). They currently owe $250,000 on the acquisition loan. They recently borrowed $110,000 on a home-equity loan. The proceeds were used to purchase a car, take a vacation, and redecorate their home. What is the maximum amount of their indebtedness that can generate deductible interest in the current year?

Answer 1

The answer is: $250,000

Step-by-step explanation:

The IRS allows interest expenses of up to $750,000 of mortgage debt to be deducted from the adjusted gross income. This deductions only include interest paid on qualified residence mortgages. So the interest expenses generated by the new loan cannot be deducted.