Reference no: EM132990303

Problem 1: Jessica purchased a home on January 1, 2018 for $640,000 by making a down payment of $260,000 and financing the remaining $380,000 with a 30-year loan, secured by the residence, at 6 percent. During 2018 and 2019, Jessica made interest-only payments on this loan of $22,800 (each year). On July 1, 2018, when her home was worth $640,000 Jessica borrowed an additional $160,000 secured by the home at an interest rate of 8 percent. During 2018, she made interest-only payments on the second loan in the amount of $6,400. During 2019, she made interest only on the second loan in the amount of $12,800. What is the maximum amount of the $35,600 interest expense Jessica paid during 2019 may she deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

Option 1: $0.
Option 2: $12,800.
Option 3: $33,506.
Option 4: $7,200.
Option 5: $35,600.