Lauren purchased a home on January 1, 2014 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 2014, Lauren made interest-only payments on the loan. On July 1, 2014, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2014, 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 chronological order of the loans to determine deductible interest expense if a limitation applies)?

Question

Quizplus · Accepted Answer

Lauren may deduct all of the interest on the first loan because it is a qualified residence loan and the loan balance does not exceed $1 million. 
For the second loan, Lauren may deduct only two-thirds of the interest because the loan balance exceeds the fair market value of the home, and no proceeds were used to substantially improve the home. If Lauren had used the proceeds to substantially improve the home, she would have been able to deduct all of the interest on the second loan.

Lauren Purchased a Home on January 1, 2014 for $500,000