In year 1 Gabby purchased a new home for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6%. In 2012. On year 3 Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, year 3, Gabby executed two home equity loans (both secured by the home). The first was for $80,000 at an interest rate of 7%. The second home equity loan from a different bank later on the day was for $40,000 at an interest rate of 9%. In year 3, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home.
- What is the maximum amount of interest expense Gabby can deduct on these loans as home related interest expense?