Javier and Anita Sanchez purchased a home on January 1, 2016, for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. The Sanchezes’ marginal tax rate is 30 percent.

a) What is the after-tax cost of the interest expense to the Sanchezes in 2016?

b) Assume the original facts, except that the Sanchezes rent a home and pay

$21,000 in rent during the year. What is the after-tax cost of their rental payments in 2016?

c) Assuming the interest expense is their only itemized deduction for the year and that Javier and Anita file a joint return, have great eyesight, and are under 60 years of age, what is the after-tax cost of their 2016 interest expense?

46. Javier and Anita Sanchez purchased a home on January 1 of year 1 for

$500,000 by paying $50,000 down and borrowing the remaining $450,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest.

a) Assume the Sanchezes also took out a second loan (on the same day as the first loan) secured by the home for $80,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. The Sanchezes make interest-only payments on the loan in year 1. What is the maximum amount of their deductible interest expense (on both loans combined) in year 1?

b) Assume the original facts and that the Sanchezes take out a second loan (on the same day as the first loan) secured by the home in the amount of $50,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. The Sanchezes make interest-only payments during the year.

What is the maximum amount of their deductible interest expense in year 1 on both loans combined?

47. Javier and Anita Sanchez purchased a home on January 1 of year 1 for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. On January 1, the Sanchezes also borrowed money on a second loan secured by the home for $75,000. The interest rate on the loan is 8 percent and the Sanchezes make interest-only payments in year 1 on the second loan.

a) Assuming the Sanchezes use the second loan to landscape the yard to their home, what is the maximum amount of interest expense (on both loans combined) they are allowed to deduct in year 1?

b) Assume the original facts and that the Sanchezes use the $75,000 loan proceeds for an extended family vacation. What is the maximum amount of interest expense

(on both loans combined) they are allowed to deduct in year 1?

c) Assume the original facts, except that the Sanchezes borrow $120,000 on the second loan and they use the proceeds for an extended family vacation and other personal expenses. What is the maximum amount of interest expense

(on both loans combined) they are allowed to deduct in year 1?