Joseph and Sandra, married taxpayers, took out a mortgage on their home for $350,000 15 years ago. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000 . They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on
which they can deduct home equity interest?
a. $50,000
b. $100,000
c. $220,000
d. $230,000
e. None of the above
b
RATIONALE: Interest is deductible only on the portion of the $220,000 home equity loan that does not exceed the lesser of:
?
The fair market value of the residence, reduced by the acquisition indebtedness ($450,000 FMV – $250,000 acquisition indebtedness = $200,000).
? $100,000 ($50,000 for married persons filing separate returns).
Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest.
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