9. Javier and Anita Sanchez purchased a home on January 1, 2017, for $500,000 by

Question

9.

Javier and Anita Sanchez purchased a home on January 1, 2017, for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. The Sanchezes’ marginal tax rate is 30 percent.

a. What is the after-tax cost of the interest expense to the Sanchezes in 2017?

After-tax cost of the interest expense: $_____________

b. Assume the original facts, except that the Sanchezes rent a home and pay $21,000 in rent during the year. What is the after-tax cost of their rental payments in 2017?

After- tax cost of the rental payments: $_______________

Explanation / Answer

Ans.a After tax cost of interest expense: 14700 Ans.b After tax cost of interest expense: 21000 Particulars Amount before tax interest expense 21000 (300000 * 7%) Less: Tax savings from interest expense -6300 (21000 * 30%) After-tax cost of interest expense 14700 rental payment is not deductible. because there is not any tax savings, Thus the before tax and after tax rental payment is equal.

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