Question

Miller owns a personal residence with a fair market value of $337,700 and an outstanding first mortgage of 270,160, which was entirely used to acquire the residence. This year Miller gets a home equity loan of $16,885 to purchase new jet skis.

How much of this mortgage debt is treated as qualified residence indebtedness?
$

Answer 1

Solution: Whole amount = $16,885 is treated as qualified residence indebtedness.

It can be computed as follows:

Qualified home-equity indebtedness is limited to the lesser of (1) FMV of residence - acquisition debt related to residence and (2) $100,000.

i.e. Lesser of (1) $337,700 - 270,160 and (2) $100,000

= Lesser of (1) $67,540 and (2) 100,000

   = $67,540

Since the home equity loan is less than $67,540, whole amount (i.e. interest on such loan is deductible ) of home equity loan $16,885 is treated as qualified residence indebtedness.