Javier and Anita Sanchez purchased a home on January 1 of year 1 for $500,000 by paying $50,000 down and borrowing the remaining $450,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest.
a. Assume the Sanchezes also took out a second loan (on the same day as the first loan) secured by the home for $80,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. The Sanchezes make interest-only payments on the loan in year 1. What is the maximum amount of their deductible interest expense (on both loans combined) in year 1?
b. Assume the original facts and that the Sanchezes take out a second loan (on the same day as the first loan) secured by the home in the amount of $50,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. The Sanchezes make interest-only payments during the year. What is the maximum amount of their deductible interest expense (on both loans combined) in year 1?