Jessica purchased a home on January 1, 2020, for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. During 2020 and 2021, Jessica made interest-only payments on this loan of $18,000 (each year). On July 1, 2020, when her home was worth $500,000, Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2020, she made interest-only payments on the second loan in the amount of $5,000. During 2021, she made interest-only payments on the second loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2021 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

Question

Quizplus · Accepted Answer

Jessica can deduct the interest on the first $750,000 of home acquisition debt. Since her total debt ($300,000 + $125,000 = $425,000) is less than $750,000, and she used the proceeds of the second loan for substantial improvements to her home, the interest on both loans is fully deductible. Therefore, she can deduct the full $28,000 of interest she paid in 2021.

Jessica Purchased a Home on January 1, 2020, for $500,000