On January 1, year 1 Brandon and Alisa Roy purchased a home for $1.5 million by paying $500,000 down and borrowing the remaining $1 million with a 7 percent loan secured by the home. Later the same day, the Roys took out a second loan, secured by the home, in the amount of $300,000.
a. Assuming the interest rate on the second loan is 8 percent. What is the maximum amount of the interest expense the Roys may deduct on these two loans (combined) in year 1?
b. Assuming the interest rate on the second loan is 6 percent, what is the maximum amount of interest expense the Roys may deduct on these two loans (combined) in year 1?