Question

On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home. The Franklins paid interest only on the loan for year 1, year 2, and year 3 (unless stated otherwise). a. What is the amount of interest expense the Franklins may deduct in year 3 assuming year 1 is 2017?

Answer 1

The Franklins can deduct $91,000 in interest expense for year 3. This is calculated by multiplying the loan amount of $1.3 million with the annual interest rate of 7 percent.

Step-by-step explanation:

The amount of interest expense the Franklins may deduct in year 3 can be calculated based on the original loan amount and the interest rate. Since they borrowed $1.3 million at a 7 percent interest rate and paid interest only for the first three years, the annual interest payment would remain constant for each of those years.

To calculate the interest for year 3, we use the following formula:

Annual Interest Payment = Loan Amount × Interest Rate

In this case:

Annual Interest Payment = $1,300,000 × 0.07

This results in:

Annual Interest Payment = $91,000

Therefore, the Franklins can deduct $91,000 in interest expense for year 3.