Question

On July 1 of the current year, Marcia purchases a new home and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year?a. $0

b. $160
c. $3,200
d. $6,400

Answer 1

D) $6,400

Step-by-step explanation:

Each point is worth principal x 1% = $320,000 x 1% = $3,200, times 2 points = $6,400

The IRS considers mortgage points are interest paid in advance, therefore the taxpayer can decide to deduct them completely during the current year's tax return or prorate them for the total length of the debt.

Unless their income taxes are too low this year, generally people will deduct all of the amount at once because the IRS doesn't recognize any interest on deductions or taxes paid in advance. Following the basic premise of finance, that the value of money decreases in time, then $1 less today is worth more than $1 less in the future.

Answer 2

D) $6,400

Step-by-step explanation:

To calculate the points deducted by Marcia in the current year, we use the following method

Since she collected the loan in July of the current year, there is five (5) months remaining in the current year, for Marcia to deduct any point, the will need to divide the number of month(s) remaining by the money she borrowed while we have have as;

$320,000/ 5

= $64,000