One of your friends from high school, Steve Einerson, calls you on April 10, 2019 and indicates he has a tax question (that you will certainly know off the top of your head). He indicates the following as background information.

On January 2, 2018, he borrowed $80,000 from Wells Fargo on a home equity loan a loan where the bank placed a second mortgage on Steves home for security on the $80,000 loan.

Steves $80,000 loan is a three-year balloon note with interest due and payable at the end of each calendar quarter. All principal will be due and payable on December 31, 2020. Wells Fargo is charging Steve an annual interest rate of 6.75% on the loan.

Steve took the $80,000 of home mortgage proceeds and purchased a boat he got a steal on the boat since it was January and the seller was desperate to dispose of his boat.

Home Equity Loan Interest

Steve wants to know if the interest he has paid on the loan during 2018 (a total of $5,400) is fully deductible. You tell him that it is deductible generally but you know there are some limitations and before giving him a definitive answer, you want to look up the rules. You tell him you will get back with him shortly.

You perform the necessary research and determine what Steve can and cannot deduct.