Question

In each of the following cases, indicate the amount of the deduction for the current year. In each case, assume the taxpayer is a calendar year, cash basis taxpayer.

a. On December 31, P, wishing to reduce his current year’s tax liability, prepaid $3,000 of interest on his home mortgage for the first three months of the following taxable year.

b. On December 1 of this year, T obtained a $100,000 loan to purchase her residence . The loan was secured by the residence. She paid two points to obtain the loan bearing a 6% interest rate.

c. Same as (b) except the loan was used to purchase a duplex, which she will rent to others. The loan was secured by the duplex.

Answer 1

a. On December 31, P, wishing to reduce his current year’s tax liability, prepaid $3,000 of interest on his home mortgage for the first three months of the following taxable year.	$3000 is not deductible in the current year ,it will deductible in the following year when the interest accrues.
b. On December 1 of this year, T obtained a $100,000 loan to purchase her residence . The loan was secured by the residence. She paid two points to obtain the loan bearing a 6% interest rate.	$2,000 ($100,000 x 2%) paid points is deductible since it is related to acquisition financing.
c. Same as (b) except the loan was used to purchase a duplex, which she will rent to others. The loan was secured by the duplex.	$2,000 ($100,000 x 2%) paid points is not deductible since it is not related to acquisition of a principal residence will be deducted ratably over the period of the loan.