Derek and Meagan Jacoby recently graduated from State University and Derek accepted a job in business 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 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 Meagans 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 4.5 percent on the loan or paying no points and receiving a fixed interest rate of 5.75 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 dont have school-related debt, so they will save the $75,000 if they dont purchase a home. Also, consider the following:

• The couples marginal tax is 24 percent.
• Regardless of whether they buy or rent, the couple will itemize deductions.
• If they buy, the Jacobys would purchase and move into the home on January 1, 2019.
• If they buy the home, the property taxes for the year are $3,600
• Disregard loan-related fess not mentioned above.
• If the couple does not buy a home, they will out their money into their savings account when they earn 5 percent annual interest.
• Assume that all unstated costs are equal between the buy and rent option.

Required:

Help if the Jacobys with their decision by answering the following questions:

1. If the Jacobys decide to rent their home, what is their after-tax cost of rental for the first year? (Include income from the savings account in your analysis.)
2. 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 Jacobys 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 2019? Assume that the Jacobys interest rate is 5.75 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, 2019, 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 the 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 does 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.)
5. Assume the same facts in part (d), expect that the Jacobys sell their home for $450,000 and they pay $7,500 commission. What effects does the sale have on the 2019 tax liability? Recall that the Jacobys are subject to an ordinary, marginal tax rate of 24% and assume that they do not have any other transaction involving capital assets in 2019.