Question

In year 0, Eva took out a $50,000 home-equity loan from her local credit union. At the time she took out the loan, her home was valued at $350,000. At the time of the loan, Eva’s original mortgage on the home was $265,000. At the end of year 1, her original mortgage is $260,000. Unfortunately for Eva, during year 1, the value of her home dropped to $280,000. Consequently, as of the end of year 1, Eva’s home secured $310,000 of home-related debt but her home is only valued at $280,000. Assuming Eva paid $14,000 of interest on the original mortgage and $2,000 of interest on the home-equity loan during the year, how much qualified residence interest can Eva deduct in year 1?

Answer 1

Solution: 16,000

Working:

The determination of the fair market value of the Eva's home will be made on date when she took out the loan of $50,000. Since the home was valued at $350,000 at that time, thus the total amount of $50,000 is considered to be home-equity indebtedness even though the home value subsequently falls to the point that Eva does not have available equity of $50,000 in the home. Thus, in year 1, she will allowed to deduct the the entire $2,000 from the home-equity loan and entire $14,000 interest on the original mortgage, which totals $16,000 ( = $2,000 + $14,000)