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 interest expense if a limitation applies)?

Question

Quizplus · Accepted Answer

According to the tax code, mortgage interest on up to $1,000,000 of acquisition debt is tax-deductible, and interest on home equity debt up to $100,000 is tax-deductible. In this case, Lauren's first loan is an acquisition debt, and the second loan is a home equity debt. Therefore, Lauren may deduct all of the interest on the first loan. However, she can only deduct two-thirds of the interest on the second loan, unless she used the loan proceeds to substantially improve the home, in which case she would be able to deduct all of the interest. Therefore, option A is the correct answer.

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