Business, 20.07.2020 01:01 LuluMathLover101

On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home. a. What is the amount of the interest expense the Franklins may deduct in year 1?
b. Assume that in year 2, the Franklins pay off the entire loan but at the beginning of year 3, they borrow $300,000 secured by the home at a 7 percent rate. They make interest-only payments on the loan during the year. What amount of
interest expense may the Franklins deduct in year 3 on this loan (the Franklins do not use the loan proceeds to improve the home)?

c. Assume the same facts as in (b), except that the Franklins borrow $80,000 secured by their home. What amount of interest expense may the Franklins deduct in year 3 on this loan (the Franklins do not use the loan proceeds to improve the home)?

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Answer from: reaperdraws

a. What is the amount of the interest expense the Franklins may deduct in year 1?

this will depend on the total interest paid during the year, since we are not told how long their mortgage is, we cannot know exactly how much interest expense they will pay. Generally mortgages require monthly payments, so I prepared a simulated amortization schedule for the first year assuming that the mortgage lasts 30 years and a monthly payment of $8,648.93.

year beg. scheduled principalinterestending

balance payment balance

11300000 8649 106675831298934

21298934 8649 107275771297863

31297863 8649 107875711296785

41296785 8649 108475651295700

51295700 8649 1091 75581294609

61294609 8649 109775521293512

71293512 8649 1103 75451292409

81292409 8649 1110 75391291299

91291299 8649 1116 75331290183

101290183 8649 1123 75261289060

111289060 8649 1129 75201287931

121287931 8649 1136 75131286795

total interest $90,582

The total interest that can be deducted in this case would be $90,582 during year 1.

b. Assume that in year 2, the Franklins pay off the entire loan but at the beginning of year 3, they borrow $300,000 secured by the home at a 7 percent rate. They make interest-only payments on the loan during the year. What amount of interest expense may the Franklins deduct in year 3 on this loan (the Franklins do not use the loan proceeds to improve the home)?

$0, interests from home equity loans used for personal expenses are not deductible.

c. Assume the same facts as in (b), except that the Franklins borrow $80,000 secured by their home. What amount of interest expense may the Franklins deduct in year 3 on this loan (the Franklins do not use the loan proceeds to improve the home)?

$0, interests from home equity loans used for personal expenses are not deductible.

Explanation:

Answer from: Quest

Ithink that the answer is b

Answer from: Quest

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