Question

Required information The following information applies to the questions displayed below.) 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 $36,000 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 $2,450. They also found a three-bedroom home that would cost $136,000 to purchase. The Jacobys could use Meagan's inheritance for a down payment on the home. Thus, they would need to borrow $100,000 to acquire the home. They have the option of paying two discount points to receive a fixed interest rate of 4.50 percent on the loan or paying no points and receiving a fixed interest rate of 5.70 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 $36,000 if they don't purchase a home. Also, consider the following information: • The couple's marginal tax rate is 24 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, 2018 • If they buy the home, the property taxes for the year are $3,800. • 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 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 blank. Enter zero if applicable.)

c.

d.

Answer 1

After Tax Cost	$       7,220
Description	Amount	Workings
(1) Marginal tax rate	24.0%
(2) Mortgage principal	$ 100,000
(3) Mortgage interest rate	5.7%
(4) First year interest payment	$     -5,700	(2) × (3)
(5) Tax savings from interest payments	$       1,368	(1) × (4)
(6) After-tax cost of interest payments	$     -4,332	(4) + (5)
(7) Deductible property taxes for year	$     -3,800
(8) Tax savings from property tax deduction	$          912	(1) × (7)
(9) After-tax cost of real property taxes	$     -2,888	(7) + (8)
After-tax cost of buying home for 2011	$     -7,220	(6) + (9)
d1) Realized Gain (Loss)	$     13,000
Recognized Gain (Loss)	$             -
d2) Taxes Payable on Gain	$             -
Description	Amount	Workings
(1) Sales proceeds	$ 159,000
(2) Sales Commission	$   -10,000
(3) Amount realized	$ 149,000	(1) + (2)
(4) Basis in home	$ -136,000
(5) Gain realized	$     13,000	(3) + (4)
(6) Exclusion for sale of home	$   -13,000	500000*2/24
(7) Gain recognized and taxes payable on gain	$             -	(5) – (6)
Because after 2 months the Jacobys moved for work reasons, they qualify for a maximum exclusion on their home of $41,667 ($500,000 × 2/24)