In year 1, Kris purchased a new home for $200,000 by making a down payment of $150,000 and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, year 4, the outstanding balance on the loan was $40,000. On January 1, year 4, when his home was worth $300,000, Kris refinanced the home by taking out a $150,000 mortgage at 5 percent. With the loan proceeds, he paid off the $40,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During year 4, he made interest only payments on the new loan of $7,500. What amount of the $7,500 interest expense on the new loan can Kris deduct in year 4 on the new mortgage as home related interest expense?

a. $2,000

b. $5,000

c. $7,000

d. $7,500

Question

Ariana Stark

Business

Today, 17:36

In year 1, Kris purchased a new home for $200,000 by making a down payment of $150,000 and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, year 4, the outstanding balance on the loan was $40,000. On January 1, year 4, when his home was worth $300,000, Kris refinanced the home by taking out a $150,000 mortgage at 5 percent. With the loan proceeds, he paid off the $40,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During year 4, he made interest only payments on the new loan of $7,500. What amount of the $7,500 interest expense on the new loan can Kris deduct in year 4 on the new mortgage as home related interest expense?

a. $2,000

b. $5,000

c. $7,000

d. $7,500

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Answers (1)

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Kimberly Watts · Answer 1

Answer: D. $7,500

Explanation:

Before the $150,000 mortgage at 5%, the existing $40,000 balance of the loan was paid off. Therefore, only the mortgage was payable. At 5% x %150,000 = $7500 interest.

Therefore, the amount $7500 interest expense Kris will deduct as home related interest expense would be $7,500.