Patrick purchased a home on January 1, 2020, for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 6 percent. During 2020, Patrick made interest-only payments on the loan of $30,000. On July 1, 2020, when his home was worth $600,000, Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent.He used the $75,000 loan proceeds to purchase a new car. During 2020, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expensethat Patrick paid during 2020 may he deduct as an itemized deduction?
A)$0.
B)$3,000.
C)$30,000.
D)$33,000.

Question

Quizplus · Accepted Answer

The interest on the first $500,000 loan is deductible because it is acquisition debt, meaning it was used to acquire, construct, or substantially improve the taxpayer's principal residence and is secured by the same residence. The second loan of $75,000 does not qualify for deduction because it was not used to acquire, build, or substantially improve the taxpayer's home but rather to purchase a car. Therefore, only the interest on the first loan ($30,000) is deductible.

Patrick Purchased a Home on January 1, 2020, for $600,000