Derek and Meagan Jacoby recently graduated from State University and Derek accep

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Derek and Meagan Jacoby recently graduated from State University and Derek accepted a job in business consulting while Meagan accepted a job in computer programming. Meagan inherited $64,000 from her grandfather who recently passed away. The couple is debating whether they should buy or rent a home They located a rental home that meets their needs. The monthly rent is $3,150. They also found a three- bedroom home that would cost $304,000 to purchase. The Jacobys could use Meagan's inheritance for a down payment on the home. Thus, they would need to borrow $240,000 to acquire the home. They have the option of paying two discount points to receive a fixed interest rate of 4.5 percent on the loan or paying no points and receiving a fixed interest rate of 5.75 percent for a 30-year fixed loan Though anything could happen, the couple expects to live in the home for no more than five years before relocating to a different region of the country. Derek and Meagan don't have any school-related debt, so they will save the $64,000 if they don't purchase a home. Also, consider the following information: e The couple's marginal tax rate is 25 percent. Regardless of whether they buy or rent, the couple will itemize their deductions. If they buy, the Jacobys would purchase and move into the home on January 1, 2017 If they buy the home, the property taxes for the year are $4,500 Disregard loan-related fees not mentioned above If the couple does not buy a home, they will put their money into their savings account where they earn 5.00 percent annual interest. Assume that all unstated costs are equal between the buy and rent option . Required: Help the Jacobys with their decisions by answering the following questions: (Leave no answer

Explanation / Answer

D-1

D-2

Description amount explanation 1. Sales proceeds 341000 2. Sales commission (10000) 3. Amount realized 331000 1 + 2 4. Basis in home (304000) initial purchase price. Assumes interest only payments on mortgage 5. Gain realized 27000 3 + 4 6. Exclusion for sale of home (27000) Because after 2 months the Jacobys moved for work reasons, they qualify for a maximum exclusion on their home 41667 (500000*2/24) Gain recognized and taxes payable on gain 0 5 - 6 no gain, no taxes on the gain

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