Matthew Purchases a New Principal Residence in the Current Year

question 96

Multiple Choice

Matthew purchases a new principal residence in the current year and pays points of $2,000 to obtain a mortgage loan. What is the proper tax treatment for the points paid?

• A)The points are a nondeductible personal expense.
• B)The points must be amortized over the life of the loan.
• C)The points are fully deductible in the current year.
• D)The points must be capitalized into the cost of the residence.
• E)The points must be amortized over 5 years.

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Definitions:

Simple Interest

Interest charged exclusively on the initial borrowed amount, or on whatever portion of the principal is still outstanding.

Compounded Annually

A method of calculating interest in which the interest earned on an investment is reinvested, and new interest is earned on that interest annually.

Compounding

The financial process where an investment earns interest not only on the principal amount but also on the accumulated interest over time.