Rick and Carol Ryan, married taxpayers, took out a mortgage of $160,000 when purchasing their home ten years ago. In October of the current year, when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage, the Ryans took out a home equity loan for $110,000 . They used the funds to purchase a sailboat to be used for recreational purposes. The sailboat does not qualify
as a residence. What is the maximum amount of debt on which the Ryans can deduct home equity interest?
a. $75,000
b. $90,000
c. $110,000
d. $125,000
e. None of the above
a
RATIONALE: Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of:
?
The fair market value of the residence, reduced by the acquisition indebtedness ($200,000 FMV – $125,000 acquisition indebtedness = $75,000).
? $100,000 ($50,000 for married persons filing separate returns).
On a joint return, Rick and Carol can deduct all of the interest on the first mortgage since it is acquisition indebtedness. Of the $110,000 home equity loan, interest on $75,000 is deductible as home equity interest.
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