This year,Mr.and Mrs.Franklin paid $93,000 interest on a mortgage they incurred to build their home in Santa Fe.The average principal balance of the mortgage was $1.43 million.The home has an appraised FMV of only $900,000.Compute the Franklin's itemized deduction for their home mortgage interest.

Question

Quizplus · Accepted Answer

The deduction for mortgage interest is limited to the interest paid on up to $750,000 of acquisition debt (debt incurred to buy, build, or substantially improve a primary or secondary home) for mortgages taken out after December 15, 2017. The Franklins' mortgage was incurred before that date, so their limit is $1 million of acquisition debt. However, they only have an appraised FMV of $900,000, which means their mortgage is technically partly non-acquisition debt. To calculate the amount of interest that qualifies for the deduction, we need to proportion the debt based on the value of the home.

$900,000/$1,430,000 = 0.6294

So, only 62.94% of their mortgage qualifies as acquisition debt, which is $898,515 ($1.43 million x 0.6294). Therefore, the deductible interest is $65,035 ($93,000 x 0.6986) which is 69.86% of the total interest paid.

This Year,Mr