Question: In Year 1 Jorge buys a home for $200,000, making a down payment of $40,000 and taking out a loan from the bank for $160,000

In Year 1 Jorge buys a home for $200,000, making a down payment of $40,000 and taking out a loan from the bank for $160,000 to finance the balance. In Year 5 the remaining loan balance is $130,000 while the home has increased in value to $270,000. Jorge refinances with a loan company that agrees to lend 125% of the value of the home, or $337,500, using $130,000 to repay the bank loan and providing $207,500 in cash. Jorge immediately spends $10,000 of the cash on a lavish vacation to the Bahamas, and $20,000 to pay down credit cards. How much of the $337,500 home equity loan balance is allowable for calculating the home mortgage interest deduction on Jorge's Year 5 tax return?
a. $270,000
b. $240,000
c. $230,000
d. $220,000

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