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Deductions from Purchases and Non-Deductible Items

Prepaid Interest. During the current year, Richard and Alisha, a married couple who use the cash method of accounting, purchased a principal residence for $320,000. They paid $40,000 down and financed the remaining $280,000 of the purchase price with a 30-year mortgage. At the closing, they also paid $500 for an appraisal, $500 for a title search, and 1.5 points representing additional interest over the term of the loan. At the end of the year, Richard and Alisha received a statement from the mortgage company indicating that $12,000 of their total monthly payments made during the year represents interest and $1,000 is a reduction of the principal balance.
a. What is the total amount Richard and Alisha may deduct in the current year arising from the purchase and ownership of their home?
b. What is the treatment of the other items that are not deductible?

Solution Preview

Dear Student,

(a) The entire amount of interest paid on mortgage is tax-deductible, hence the amount is 12,000.

(b) All other fees ...

Solution Summary

This solution discusses deductions from purchases and ownership of homes and the treatment of non-deductible items.