Question

Jessica purchased a home on January 1,2022 , for $580,000 by making a down payment of $230,000 and financing the remaining $350,000 with a loan, secured by the residence, at 6 percent. During 2022 and 2023 , Jessica made interest-only payments on this loan of $21,000 (each year). On July 1,2022 , when her home was worth $580,000, Jessica borrowed an additional $145,000 secured by the home at an interest rate of 8 percent. During 2022 , she made interest-only payments on the second loan in the amount of $5,800. During 2023 , she made interest-only payments on the second loan in the amount of $11,600. What is the maximum amount of the $32,600 interest expense Jessica paid during 2023 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

Multiple Choice
a. $0
b. $11,600
c. $30,682
d. $7,200
e. $32,600

Answer 1

Jessica paid a total of e. $32,600 in interest for two home-related loans in 2023. Assuming the improvements are considered substantial, and within allowable IRS limits, the entire amount of $32,600 would likely be deductible as an itemized deduction.

Step-by-step explanation:

The question pertains to the maximum amount of interest expense that Jessica can deduct on her itemized deductions for the year 2023. In the scenario provided, Jessica made interest-only payments on two different loans secured by her home. The first loan was for $350,000 at a 6% interest rate, with payments of $21,000 each year, and the second loan was $145,000 at an 8% interest rate, where she paid $11,600 in interest for the year 2023.

According to the IRS rules for mortgage interest deduction, the interest on a mortgage used to buy, build, or substantially improve your home can be deducted if the loans are secured by the home. Since Jessica used the proceeds of the second loan to finish her basement and landscape her yard, which can be considered home improvements, the interest on both loans may be deductible.

The total interest she paid in 2023 was $21,000 for the first loan plus $11,600 for the second loan, equaling $32,600. This amount is entirely deductible assuming it's within the limits of home acquisition debt and home equity debt set by the tax code and that Jessica itemizes her deductions on her tax return.