Rick and Carol Ryan, married taxpayers, took out a mortgage of $160,000 when purchasing their home ten years ago. In October of the current year, when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage, the Ryans took out a home equity loan for $110,000. They used the funds to purchase a sailboat to be used for recreational purposes. The sailboat does not qualify as a residence. What is the maximum amount of debt on which the Ryans can deduct home equity interest?

Question

Quizplus · Accepted Answer

The maximum debt on which the Ryans can deduct home equity interest is limited to the lesser of $100,000 ($50,000 for married taxpayers filing separately) or the fair market value of the home minus the outstanding mortgage balance ($200,000 - $125,000 = $75,000). Since they used the proceeds of the home equity loan to purchase a sailboat, which is not a qualified residence, the interest on $75,000 of their home equity loan would be deductible as home mortgage interest.

Rick and Carol Ryan, Married Taxpayers, Took Out a Mortgage