Question

Which of the following statements is false? When deductible, the interest tracing rules require that the proceeds from home equity debt be used to acquire or improve the residence in order for the interest thereon to be deductible. The interest tracing rules require interest expense to be allocated in the same manner in which the proceeds from the loan are used to pay the various types of expenditures. Acquisition Indebtedness is debt that is incurred to acquire, construct, or improve a qualified residence.                    By statutory definition, both home equity debt and acquisition debt must be secured by the taxpayer's residence.

Which of the following statements is false for debt incurred in 2017? Compliance with the tracing rules is not required for acquisition indebtedness if the expenditures to acquire the residence were made within ninety days either before or after the date the debt is incurred. A single home mortgage debt can be both acquisition debt and home equity debt at the same time. The combined amount of home equity indebtedness for which a taxpayer may deduct interest is limited to $1,000,000 ($500,000 for a married couple filing separate tax returns). If a taxpayer refinances qualified acquisition indebtedness with a new mortgage loan and the proceeds of the new loan are traceable to pay-off the old home mortgage, the interest thereon will be deductible as qualified residence interest.

In 2018, what is the maximum amount of home mortgage debt (both acquisition and home equity) upon which a taxpayer may take an itemized deduction for interest expense? The acquisition debt was acquired in June 2017, and the home equity (used to buy a Mercedes) was acquired in September 2018. $750,000. $850,000 $1,000,000. None of the above.

Which of the following statements regarding the deductibility of points is false? Points charged for underwriting services to obtain the loan are deductible as interest because, without those services, the taxpayer would not be able to acquire the loan. To be fully deductible in the year paid, points must be charged on the taxpayer's residential mortgage and not commercial property, and cannot be paid with borrowed funds. To be fully deductible in the year paid, points must constitute prepaid interest and must be an established business practice in the area where the loan is made. To be fully deductible in the year paid, the points paid may not exceed the amount generally charged in the area where the loan is made.

Answer 1

1. Answer is option B

The interest tracing rules require interest expense to be allocated in the same manner in which the proceeds from the loan are used to pay the various types of expenditures.

The loan should be used to pay specific expenditures.

2. Answer is option A

Compliance with the tracing rules is not required for acquisition indebtedness if the expenditures to acquire the residence were made within ninety days either before or after the date the debt is incurred.

Compliance with the tracing rules is required for acquisition indebtedness if the expenditures to acquire the residence were made within ninety days either before or after the date the debt is incurred.

3. Answer is C $1,000,000

The combined amount of home equity indebtedness for which a taxpayer may deduct interest is limited to $1,000,000 ($500,000 for a married couple filing separate tax returns)

4. Answer is option C

To be fully deductible in the year paid, points must constitute prepaid interest and must be an established business practice in the area where the loan is made.

To be fully deductible in the year paid, points must not constitute prepaid interest and must be an established business practice in the area where the loan is made