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

Exercise 36

On January 1 of year 1, Jason and Jill Marsh acquired a home for $500,000 by paying $400,000 down and borrowing $100,000 with a 7 percent loan secured by the home.On January 1, of year 2, the Marshes needed cash so they refinanced the original loan by taking out a new $250,000 7 percent loan.With the $250,000 proceeds from the new loan, the Marshes paid off the original $100,000 loan and used the remaining $150,000 to fund their son's college education.
a.What amount of interest expense on the refinanced loan may the Marshes deduct in year 2
b.Assume the same facts as in (a), except that the Marshes use the $150,000 cash from the refinancing to add two rooms and a garage to their home.What amount of interest expense on the refinanced loan may the Marshes deduct in year 2