Reference no: EM133077722

Question - In year 1, Adam borrowed $500,000 on an unsecured revolving line of credit. The stated rate of interest on this line is 4%, fixed. Adam used the funds from this loan as follows:

Purchase of motorcycle, Jet Ski, and other personal items: $50,000

Investment in Condo for rental 200,000

Investment in stocks, bonds, and mutual funds 100,000

Purchase of equipment and inventory for his business 150,000

(a) In year 2, Adam paid $20,000 in interest on this line of credit. Determine the tax treatment of this amount (how much, if any, is deductible, and subject to what limitations).

(b) In year 3, Adam paid off $300,000 of the amount he borrowed on this line of credit. In year 4, he paid $8,000 of interest on the remaining $200,000 balance of this loan. Determine the tax treatment of this amount (how much, if any, is deductible, and subject to what limitations).