Question

Which of the following statements regarding interest expense on home-related debt is correct?

A. Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.
B. Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.
C. Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited amount of home equity indebtedness.
D. None of these statements is correct.

Answer 1

Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.

Step-by-step explanation:

The correct statement regarding interest expense on home-related debt is A. Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.

When taxpayers have home equity indebtedness, they are allowed to deduct the interest expense on a limited amount. However, for home acquisition indebtedness, taxpayers can deduct the interest expense on an unlimited amount. This means that the interest expense on the debt used to acquire, build, or substantially improve a qualified residence can be fully deducted on the taxpayer's tax return.