In year 1,Jaspreet purchased a new home for $500,000 by making a down payment of $400,000 and financing the remaining $100,000 with a loan,secured by the residence,at 6 percent.In year 3,Jaspreet made interest only payments of $6,000 on the $100,000 loan.On January 1,year 3 when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home).The first (early in the day)was for $80,000 at an interest rate of 9 percent.The second home equity loan from a different bank (later in the day)was for $40,000 at an interest rate of 7 percent.In year 3,Jaspreet paid $7,200 of interest payments on the first home equity loan and $2,800 interest expense on the second.Jaspreet used the proceeds from both home-equity loans for purposes unrelated to the home.What is the maximum amount of interest expense Jaspreet can deduct on these loans as home related interest expense?

Question

Quizplus · Accepted Answer

Jaspreet can deduct the interest expense on the $100,000 loan as home related interest expense, which is $6,000 in year 3. 
For the home equity loans, he can only deduct interest expense up to the fair market value of the home reduced by the amount of the loan, i.e. $500,000 - $80,000 - $40,000 = $380,000. 
Therefore, he can deduct interest expense on $380,000 of the home equity loans, which is ($380,000 x 9%) + ($380,000 x 7%) = $34,200. 
However, he already used $6,000 of interest expense towards the $100,000 loan, so the maximum amount he can deduct as home related interest expense is $6,000 + $28,200 = $14,200. 
Therefore, the correct answer is C) $14,600.

In Year 1,Jaspreet Purchased a New Home for $500,000 by Making