Question

Patrick purchased a home on January 1, year 2018 for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 6 percent. During 2018, Patrick made interest-only payments on the loan of $30,000. On July 1, 2018, when his home was worth $600,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent. During 2018, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expense Patrick paid during 2018 may he deduct as an itemized deduction if he used the $75,000 from the July 1 loan to purchase a car?

a.) $0
b.) $3,000
c.) $30,000
d.) $33,000

Answer 1

Option (C) is correct.

Step-by-step explanation:

Total Borrowings:

= Amount borrowed and used to buy homes + Amount borrowed and not used for homes

= $500,000 + $75,000

= $575,000

Total Interest:

= Interest at 6% + Interest on $75,000

= ($500,000 × 6%) + $3,000

= $30,000 + $3,000

= $33,000

Therefore, the eligible deduction(Used to buy home) = $30,000

Hence, Mr. Patrick would be eligible to claim itemized deduction of interest of $30,000.