Question

1. Brian bought a house 15 years ago for $120,000 as his principal residence. He paid 10%

down payment. What was the amount of equity on his home at that time?

2. Brian’s home is worth $450,000 now and his mortgage balance is $50,000. What is the

amount of equity on his home?

3. Brian paid $14,700 in mortgage interest, $6,300 in mortgage principal and $4,500 in

property tax. He is in the 35% tax bracket. What’s his income tax savings?

4. Brian bought a house 30 years ago with $275,000 as his principal residence. He sold the

house for $620,000 this year and paid $31,000 for commission. His income tax bracket is

33% and long-term capital gain tax is 15%. How much should he pay for capital gain tax?

Answer 1

1. Equity of house at the time of purchase is nothing but the down payment value...

Therefore , equity of brain's house 15 years ago would be $120000*10% .

I.e, $12000

2 . Equity of house at present is the difference between current market value less

Mortgage balance ... i.e, $450000-$50000= $400000

3. The interest paid for mortgage is tax deductible while principal is not...

Hence ,the amount of tax savings would be the amount of tax reduced due to interest deduction ... Hence tax savings would be $14700×35%

4. Capital gain= sale value of house - indexed value of cost of purchase

But the year of purchase of property is not given in the question to calculate indexed value of purchase.

Further , the amount of capital gain tax would be

• [capital gain - commission( considering it to be tax deductible) ] × 15%