Kimberly purchased a home on January 1, 2013 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, at 6 percent. During 2013 and 2014 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2013, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2013, she made interest-only payments on this loan in the amount of $5,000 and during 2014, she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Kimberly paid during 2014 that she may deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

Question

Quizplus · Accepted Answer

The maximum amount of interest expense that Kimberly may deduct as an itemized deduction is $26,353. This is because the proceeds of the second loan were used to pay off student loans from law school, which are not deductible. Therefore, the interest expense on the second loan is not deductible. The interest expense on the first loan is deductible up to the amount of the loan balance, which is $300,000. The interest expense on the second loan is deductible up to the amount of the loan balance, which is $125,000. Therefore, the total amount of interest expense that Kimberly may deduct as an itemized deduction is $26,353.

Kimberly Purchased a Home on January 1, 2013 for $500,000