Two years ago,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 2013,Jaspreet made interest only payments of $6,000 on the $100,000 loan.On January 1,2013,when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home) .The first was for $80,000 at an interest rate of 9 percent.The second home equity loan from a different bank was for $40,000 at an interest rate of 7 percent.In 2013,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 the 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

To calculate the maximum amount of interest expense that Jaspreet can deduct as home related interest expense, we have to follow certain rules. 
1) The total amount of debt secured by the home cannot exceed the fair market value of the home. 
2) The loan must be secured by the home.
3) The loan proceeds must be used for home improvement or other home-related purposes.

According to the question, Jaspreet purchased the home for $500,000 and made a down payment of $400,000. Therefore, the initial loan amount was $100,000. In 2013, he made interest-only payments of $6,000 on that loan. So, the outstanding balance of the loan will be $100,000 at the end of 2013.

On 1st January 2013, Jaspreet executed two home equity loans - one for $80,000 at an interest rate of 9%, and the other for $40,000 at an interest rate of 7%. Both of these loans are secured by the home.

The total amount of debt secured by the home now is $100,000 (initial loan) + $80,000 (first home equity loan) + $40,000 (second home equity loan) = $220,000. This amount is less than or equal to the fair market value of the home, which is $500,000. So, the first rule is satisfied.

Now, we have to check whether these loans are used for home-related purposes or not. According to the question, Jaspreet used the proceeds from the home equity loans for purposes unrelated to the home. So, the third rule is not satisfied.

Therefore, the maximum amount of interest expense that Jaspreet can deduct as home-related interest expense will be $6,000 (interest-only payments made on the initial loan). He cannot deduct any interest expense on the home equity loans as they are not used for home-related purposes.

Hence, the correct answer is option C.

Two Years Ago,Jaspreet Purchased a New Home for $500,000 by Making