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

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 exact method to determine deductible interestexpense if a limitation applies) ?

A) Lauren may deduct all of the interest on the first loan and all of the interest on the second loan no matter what she does with the loan proceeds.
B) Lauren may deduct all of the interest on the first loan or all of the interest on the second loan.
C) Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan unless she uses the loan proceeds to substantially improve the home in which case she would be able to deduct all of the interest.
D) Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan no matter what she does with the proceeds of the second loan.