ExpertMedium1 markMultiple Choice
CPA · Question 09 · Area 1: Individual Tax
A taxpayer purchased a home for $1,000,000 in Year 1 (post-2017), taking out a $900,000 mortgage secured by the home. In Year 2, the taxpayer took out a $50,000 Home Equity Line of Credit (HELOC) to pay for a vacation. The interest paid in Year 2 was $36,000 on the mortgage and $2,500 on the HELOC. What is the deductible qualified residence interest for Year 2?
A taxpayer purchased a home for $1,000,000 in Year 1 (post-2017), taking out a $900,000 mortgage secured by the home. In Year 2, the taxpayer took out a $50,000 Home Equity Line of Credit (HELOC) to pay for a vacation. The interest paid in Year 2 was $36,000 on the mortgage and $2,500 on the HELOC. What is the deductible qualified residence interest for Year 2?
Answer options:
A.
$38,500
B.
$30,000
C.
$36,000
D.
$32,083
How to approach this question
1. Identify Debt Limits (TCJA): For acquisition debt after Dec 15, 2017, limit is $750,000.<br/>2. HELOC Rule: Interest only deductible if used to buy, build, or substantially improve the home. Here, used for vacation -> Not deductible.<br/>3. Calculate Deductible Mortgage Interest: Total Debt $900,000. Limit $750,000.<br/>4. Ratio: $750,000 / $900,000 = 0.8333.<br/>5. Deductible Interest: $36,000 * 0.8333 = $30,000.
Full Answer
B.$30,000✓ Correct
B
1. The HELOC interest ($2,500) is nondeductible because the funds were used for personal purposes (vacation).<br/>2. The acquisition debt ($900,000) exceeds the statutory limit of $750,000 for post-2017 loans.<br/>3. Deductible portion = Total Interest * ($750,000 / $900,000).<br/>4. $36,000 * (750/900) = $30,000.
Common mistakes
Deducting HELOC interest used for personal expenses or using the pre-TCJA $1M limit.
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