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 amount of debt on which the Ryans can deduct home equity interest is limited to the lesser of $100,000 ($50,000 for married filing separately) or the fair market value of the home reduced by the acquisition debt (mortgage) on the home. In this case, the fair market value of the home is $200,000 and the acquisition debt is $125,000, leaving $75,000 as the maximum amount of debt on which the Ryans can deduct home equity interest. The fact that they used the funds to purchase a sailboat that does not qualify as a residence does not affect the calculation of the limit.

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