Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $36,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,450.They also found a three-bedroom home that would cost $136,000 topurchase. The Jacobys could use Meagan’s inheritance for a downpayment on the home. Thus, they would need to borrow $100,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.50 percent on the loanor paying no points and receiving a fixed interest rate of 5.70percent for a 30-year fixed loan.
Though anything could happen, the couple expects to live in thehome for no more than five years before relocating to a differentregion of the country. Derek and Meagan don’t have anyschool-related debt, so they will save the $36,000 if they don’tpurchase 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 itemizetheir deductions.
If they buy, the Jacobys would purchase and move into the homeon 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 moneyinto their savings account where they earn 5 percent annualinterest.
Assume that all unstated costs are equal between the buy andrent option.
Required: Help the Jacobys with their decisionsby answering the following questions: (Leave no answerblank. Enter zero if applicable.)
a If the Jacobys decide to rent the home, whatis their after-tax cost of the rental for the first year (includeincome from the savings account in your analysis)? (Roundyour intermediate calculations to the nearest whole dollaramount.)
Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $36,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,450.They also found a three-bedroom home that would cost $136,000 topurchase. The Jacobys could use Meagan’s inheritance for a downpayment on the home. Thus, they would need to borrow $100,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.50 percent on the loanor paying no points and receiving a fixed interest rate of 5.70percent for a 30-year fixed loan.
Though anything could happen, the couple expects to live in thehome for no more than five years before relocating to a differentregion of the country. Derek and Meagan don’t have anyschool-related debt, so they will save the $36,000 if they don’tpurchase 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 itemizetheir deductions.
If they buy, the Jacobys would purchase and move into the homeon 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 moneyinto their savings account where they earn 5 percent annualinterest.
Assume that all unstated costs are equal between the buy andrent option.
Required: Help the Jacobys with their decisionsby answering the following questions: (Leave no answerblank. Enter zero if applicable.)
rev: 12_18_2018_QC_CS-151658
a. If the Jacobys decide to rent the home, whatis their after-tax cost of the rental for the first year (includeincome from the savings account in your analysis)? (Roundyour intermediate calculations to the nearest whole dollaramount.)
Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $36,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,450.They also found a three-bedroom home that would cost $136,000 topurchase. The Jacobys could use Meagan’s inheritance for a downpayment on the home. Thus, they would need to borrow $100,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.50 percent on the loanor paying no points and receiving a fixed interest rate of 5.70percent for a 30-year fixed loan.
Though anything could happen, the couple expects to live in thehome for no more than five years before relocating to a differentregion of the country. Derek and Meagan don’t have anyschool-related debt, so they will save the $36,000 if they don’tpurchase 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 itemizetheir deductions.
If they buy, the Jacobys would purchase and move into the homeon 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 moneyinto their savings account where they earn 5 percent annualinterest.
Assume that all unstated costs are equal between the buy andrent option.
Required: Help the Jacobys with their decisionsby answering the following questions: (Leave no answerblank. Enter zero if applicable.)
rev: 12_18_2018_QC_CS-151658
a. If the Jacobys decide to rent the home, whatis their after-tax cost of the rental for the first year (includeincome from the savings account in your analysis)? (Roundyour intermediate calculations to the nearest whole dollaramount.)
Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $36,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,450.They also found a three-bedroom home that would cost $136,000 topurchase. The Jacobys could use Meagan’s inheritance for a downpayment on the home. Thus, they would need to borrow $100,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.50 percent on the loanor paying no points and receiving a fixed interest rate of 5.70percent for a 30-year fixed loan.
Though anything could happen, the couple expects to live in thehome for no more than five years before relocating to a differentregion of the country. Derek and Meagan don’t have anyschool-related debt, so they will save the $36,000 if they don’tpurchase 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 itemizetheir deductions.
If they buy, the Jacobys would purchase and move into the homeon 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 moneyinto their savings account where they earn 5 percent annualinterest.
Assume that all unstated costs are equal between the buy andrent option.
Required: Help the Jacobys with their decisionsby answering the following questions: (Leave no answerblank. Enter zero if applicable.)
a. If the Jacobys decide to rent the home, whatis their after-tax cost of the rental for the first year (includeincome from the savings account in your analysis)? (Roundyour intermediate calculations to the nearest whole dollaramount.)
b. What is the approximate break-even point inyears for paying the points to receive a reduced interest rate? (Tosimplify this computation, assume the Jacobys will makeinterest-only payments, and ignore the time value of money.)(Do not round intermediate calculations. Round your finalanswer to 1 decimal place.)
c. What is the after-tax cost (in interest andproperty taxes) of living in the home for 2018? Assume that theJacobys' interest rate is 5.70 percent, they do not pay discountpoints, they make interest-only payments for the first year, andthe value of the home does not change during the year.(Round your intermediate calculations to the nearest wholedollar amount.)
d. Assume that on March 1, 2018, the Jacobyssold their home for $159,000, so that Derek and Meagan could acceptjob opportunities in a different state. The Jacobys used the saleproceeds to (1) pay off the $100,000 principal of the mortgage, (2)pay a $10,000 commission to their real estate broker, and (3) makea down payment on a new home in the different state. However, thenew home cost only $75,000. Assume they make interest-only paymentson the loan.
Required:
d1. What gain or loss do the Jacobys realizeand recognize on the sale of their home?
d2. What amount of taxes must they pay on thegain, if any?
e. Assume the same facts as in part (d), exceptthat the Jacobys sell their home for $124,500 and they pay a $7,500commission. What effect does the sale have on their 2018 income taxliability? Recall that the Jacobys are subject to an ordinarymarginal tax rate of 24 percent and assume that they do not haveany other transactions involving capital assets in 2018.
