Question

Amanda purchased a home for $800,000 in year 1. She paid $160,000 cash and borrowed the remaining $640,000. This is Amanda's only residence. Assume that in year 10 when the home had appreciated to $1,200,000 and the remaining mortgage was $480,000, interest rates declined and Amanda refinanced her home. She borrowed $800,000 at the time of the refinancing, paid off the first mortgage, and used the remainder for purposes unrelated to the home. What is her total amount of qualifying home-related debt for tax purposes?

a. $480,000

b. $560,000

c. $800,000

d. $880,000

Answer 1

Amanda's total amount of qualifying home-related debt for tax purposes after refinancing her home is $480,000,(option a) which is the amount she used to pay off the original mortgage.

Step-by-step explanation:

The question is about determining the total amount of qualifying home-related debt Amanda has for tax purposes after refinancing her home. Amanda originally purchased the home for $800,000, paid $160,000 in cash, and borrowed $640,000. In year 10, the value of the home increased to $1,200,000, and she refinanced the home, borrowing $800,000 to pay off the remaining mortgage of $480,000, using the surplus for unrelated purposes.

For tax purposes, the Internal Revenue Service (IRS) usually limits the amount of mortgage indebtedness that can be treated as home acquisition debt to the original amount of the mortgage plus the cost of any substantial improvements. However, Amanda can only deduct interest on the portion of the refinance that was used to pay off the original mortgage, which is $480,000. Any additional amount borrowed over that original debt that isn't used for home improvement or acquisition does not qualify. Therefore, her qualifying home-related debt for tax purposes would be $480,000.

The correct answer to the question would be: a. $480,000.