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In: Finance

One of your friends, who is in 20% marginal tax bracket, is planning to buy a...

One of your friends, who is in 20% marginal tax bracket, is planning to buy a condo selling for $140,000. Your friend’s plan is to make a down payment of 20% and finance the balance from a bank at a fixed rate of 4.99% over 30 years with monthly payments. He needs your help in figuring out his first year tax savings if he decides to buy this home.

A. $3,219

B. $1,575

C. $5,551

D. $1,441

Solutions

Expert Solution

We can use the present value of annuity formula to calculate the monthly loan payment.
Present value of annuity = P x {[1 - (1+r)^-n]/r}
Present value of annuity = loan amount = $140000 x 80% = $112000
P = monthly loan payment = ?
r = interest rate per month = 4.99%/12 = 0.004158
n = number of monthly loan payments = 30 years x 12 = 360
112000 = P x {[1 - (1+0.004158)^-360]/0.004158}
112000 = P x 186.4939
P = 600.56
Monthly Loan payment = $600.56
Total payment towards loan during the year = $600.56 x 12 = $7206.67
As both repayment of loan pricipal plus interest are tax deductible , therefore
First year tax savings if he decides to buy this home = Total payment towards loan during first year x Tax rate
First year tax savings if he decides to buy this home = $7206.67 x 20% = $1,441
The answer is Option D.

jeff jeffy answered 1 year ago
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