Mr.and Mrs.K purchased their current residence in 1998 for $100,000.Since that time they have added a room and made additional improvements costing $20,000.The current balance on the mortgage loan is $40,000 and the house is worth $200,000.The couple now wishes to obtain a new mortgage on their home and use the proceeds for a second honeymoon.The maximum mortgage loan that they could obtain for which all of the interest would be deductible is
A)$20,000
B)$60,000
C)$80,000
D)$100,000
E)$140,000

Question

Quizplus · Accepted Answer

The maximum mortgage loan for which all of the interest would be deductible is based on the acquisition indebtedness, which includes the cost of acquiring, constructing, or substantially improving a residence, and is secured by the residence. The original purchase price was $100,000, and they made improvements costing $20,000, totaling $120,000. Since the current mortgage balance is $40,000, they could obtain an additional $80,000 ($120,000 - $40,000) to reach the maximum deductible limit. However, since the house is worth $200,000, they could technically borrow up to the value of the house. The interest on the first $100,000 of debt is generally deductible (the $100,000 limit applies to home equity loans used for purposes other than buy, build, or substantially improve the taxpayer's home). Given the options, the maximum loan they could obtain with fully deductible interest, considering both acquisition indebtedness and the value of the home, is $140,000. This is because they can refinance their home for more than the $120,000 acquisition indebtedness due to the increased value of their home, and the interest on the mortgage up to the value of the home (in this case, $200,000) can be deductible. The correct answer takes into account both the acquisition indebtedness and the fair market value of the home, allowing for a larger deductible mortgage interest amount under the tax code.

MrAnd MrsK Purchased Their Current Residence in 1998 for $100,000