Question

This year, Major Healy paid $33,750 of interest on a mortgage on his home (he borrowed $675,000 to buy the residence in 2015; $775,000 original purchase price and value at purchase), $5,250 of interest on a $105,000 home equity loan on his home (loan proceeds were used to buy antique cars), and $6,250 of interest on a mortgage on his vacation home (borrowed $125,000 to purchase the home in 2010; home purchased for $312,500). Major Healy's AGI is $220,000. How much interest expense can Major Healy deduct as an itemized deduction?

Answer 1

Major Healy can deduct $33,750 of interest expense on the mortgage for his main residence as an itemized deduction. The deductibility of the interest on the home equity loan and the vacation home mortgage are subject to limitations and may require additional information to determine the eligibility.

Step-by-step explanation:

To determine the interest expense that Major Healy can deduct as an itemized deduction, we need to consider the limitations set by the tax code. For mortgages taken out after December 15, 2017, the Tax Cuts and Jobs Act limits the deduction to the interest paid on up to $750,000 of qualified residence loans. In Major Healy's case, he paid $33,750 of interest on the mortgage for his main residence, which is fully deductible because it is within the limit. However, the interest paid on the home equity loan and the mortgage on his vacation home may be subject to limitations, as they exceed the $750,000 limit.

The interest paid on the home equity loan is only deductible if the proceeds were used to buy, build, or substantially improve the home, and the total debt on the main residence and the home equity loan does not exceed the home's fair market value. Since we don't have information on the fair market value of Major Healy's main residence, we cannot determine if the interest on the home equity loan is deductible.

As for the interest paid on the mortgage for the vacation home, the deduction is subject to the limits set by the tax code. Since Major Healy borrowed $125,000 to purchase the vacation home, the interest expense is deductible up to $750,000 (the limit for qualified residence loans) multiplied by the ratio of the loan amount ($125,000) to the purchase price of the vacation home ($312,500). Therefore, Major Healy can deduct $18,750 of interest expense for the vacation home mortgage.

In summary, Major Healy can deduct $33,750 of interest expense on the mortgage for his main residence as an itemized deduction. The deductibility of the interest on the home equity loan and the vacation home mortgage are subject to limitations and may require additional information to determine the eligibility.