Question

Jessica purchased a home on January 1, 2014 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 and 2015, Jessica made interest-only payments on the loan of $18,000 (each year). On July 1, 2014, when her home was worth $500,000 Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2014, she made interest-only payments on this loan in the amount of $5,000. During 2015, she made interest only payments in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2015 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home, landscape the yard, and add a home theater room in the basement of the home?

A. $0
B. $10,000
C. $26,353
D. $26,000
E. $28,000

Answer 1

Jessica can seek to deduct the full $28,000 interest expense for 2015 as it is the sum of the interest paid on the first and second loans, assuming her usage of the second loan for substantial home improvements allows full deduction under IRS rules.

Step-by-step explanation:

Jessica may deduct the interest expenses on her home as itemized deductions under the Internal Revenue Code. This includes interest on the primary loan and the secondary loan if the proceeds were used for substantial improvements to the home. Since she paid $18,000 in interest on the first loan and $10,000 on the second loan in 2015, she would be looking to deduct a total of $28,000. The limitation on mortgage interest deduction for tax purposes applies to loan amounts above $1 million (or $500,000 if married filing separately) when it comes to acquisition debt, which is defined as debt incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer. However, we would need to consult current IRS rules and any applicable limitations to determine the exact amount that Jessica can deduct, given that tax laws change and there might be specific limitations depending on the total amount of the loans, how the proceeds were used, and the value of the home.