McGraw-Hill's Taxation of Individuals 3rd Edition by Brian Spilker,Benjamin Ayers,John Robinson,Edmund Outslay ,Ronald Worsham,John Barrick,Connie Weaver

Exercise 27

On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home.
a.What is the amount of the interest expense the Franklins may deduct in year 1
b.Assume that in year 2, the Franklins pay off the entire loan but at the beginning of year 3, they borrow $300,000 secured by the home at a 7 percent rate.They make interest-only payments on the loan during the year.What amount of interest expense may the Franklins deduct in year 3 on this loan Does it matter what they do with the loan proceeds Explain.
c.Assume the same facts as in (b), except that the Franklins borrow $80,000 secured by their home.What amount of interest expense may the Franklins deduct in year 3 on this loan Does it matter what they do with the loan proceeds Explain.