Kimberly purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2 Kimberly made interest-only payments on this loan in the amount of $18,000 each year. On July 1, year 1, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During year 1, she made interest-only payments on this loan in the amount of $5,000 and, during year 2, she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense ($18,000 + $10,000) that Kimberly paid during year 2 may she deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

$0.

$5,000.

$18,000

. $26,000.

$26,353.