Question
Taxpayers purchase a home in the current year which they use as their principal residence. Unless otherwise stated, they obtain a loan secured by the
Taxpayers purchase a home in the current year which they use as their principal residence. Unless otherwise stated, they obtain a loan secured by the residence and use the proceeds to acquire the residence. What portion of the interest paid on such loan may Taxpayers deduct in the following situations: (a) The purchase price and fair market value of the home is $350,000. taxpayers obtain a mortgage for $250,000 of the purchase price. (b) The facts are the same as in (a), above, except that in two years taxpayers have reduced the outstanding prinicpal balance of the mortgage to $200,000 and the fair market value of the residence has increased to $400,000. In the later years, taxpayers take out a second mortgage for $100,000 secured by their residence to add a fourth bedroom and a den to the residence. (c) the facts are the same as in (b) except Taxpayers use the proceeds of the $100,000 mortnage to buy a Ferrari. (d) the facts are the same as in (a). Ten years later, Taxpayers have paid off $200,000 of the $250,000 mortage and the residence is worth $500,000. In the later years, Taxpayers borrow $200,000 on the residence, $50,000 of which is used to pay off te remaining balance of the orignial mortgage, and the remainder is used to pay personal debts.
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