Lauren purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence. During year 1, Lauren made interest-only payments on the loan. On July 1, year 1, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During year 1, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct? (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies)

Question

Quizplus · Accepted Answer

Interest on a home equity loan is limited to $100,000, therefore, since she borrowed $150,000 only 2/3 of the interest is deductible ($100,000 ÷ $150,000 = 2/3). If the proceeds are used to improve the home, the debt is considered acquisition indebtedness and therefore the full amount of interest would be deductibl

Lauren Purchased a Home on January 1, Year 1 for $500,000