Derek and Meagan Jacoby recently graduated from State University , and Derek accepted a job inbusiness consulting while Meagan accepted a job in computer programming . Meagan inherited $ 75,000 from her grandfather , who recently passed away . The couple is debating whether they should buy or rent a home . They located a rental home that meets their needs . The monthly rent is $2,250 They also found a three -bedroom home that would cost $ 475,000 to purchase . The Jacobys could use Meagan's inheritance for a down payment on the home Thus , they would need to borrow $400,000 to acquire the home . They have the option of paying 2 discount points to receive a fixed interest rate of 2.5 percent on a loan or paying no points and receiving a fixed interest rate of 3.75 percent for a 30-year fixed loan Though anything could happen , the couple expects to live in the home for no more than five years before relocating to a different region of the country Derek and Meagan don't have any school - related debt , so they will save the $75,000 if they don't purchase a home . Also , consider the following information : The couple's marginal tax rate is 24 percent . Regardless of whether they buy or rent , the couple will itemize their deductions and have the ability to deduct all of the property taxes from the purchase of a residence . If they buy , the Jacoby's would purchase and move into the home on January 1, 2022 If they buy the home , the property taxes for the year are $3,600 . Disregard loan -related fees not mentioned above . If the couple does not buy a home , they will put their money into their taxable annuity account where they earn 5 percent annual interest Assume that all unstated costs are equal between the buy and rent options .

1. If the Jacobys decide to rent the home, what is their after-tax cost of the rental for the first year (Include income from the annuity account in your analysis.) What is the approximate break-even point in years (or months) for paying the points to receive a reduced interest rate? (To simplify this computation , assume the Jacoby's will make interest -only payments , and ignore the time value of money .) 3. What is the after-tax cost (in interest and property taxes) of living in the home for 2022 ? Assume that the Jacobys ' interest rate is 3.75 percent , they do not pay discount points, they make interest -only payments for the first year , and the value of the home does not change during the year 4. Assume that on March 1, 2022 , the Jacobys sold their home for $525,000 so that Derek and Meagan could accept job opportunities in a different state. The Jacobys used the sale proceeds to (1) pay off the $ 400,000 principal of the mortgage , (2) pay a $10,000 commission to their real estate broker , and (3) make a down payment on a new home in a different state . However , the new home cost only $300,000 . What gain or loss do the Jacobys realize and recognize on the sale of their home , and what amount of taxes must they pay on the gain , if any ? (Assume they make interest -only payments on the loan .)