The Starks own a home in New York. They paid $1.2 million for the home several years ago. They originally took out a $1 million mortgage on the home. In the current year, the Starks refinanced their home at a time when the home was worth $2 million and the outstanding mortgage balance was $700,000. Their new mortgage is for $1.3 million. After the refinancing, the Starks's acquisition debt is:
To determine the Starks' acquisition debt after the refinancing, we need to understand the concept of acquisition debt and how it is affected by refinancing.
Acquisition debt refers to the debt that is used to acquire, construct, or substantially improve a qualified residence. In this case, the Starks' qualified residence is their home in New York.
Initially, the Starks took out a $1 million mortgage to purchase the home. This mortgage was considered acquisition debt because it was used to acquire the qualified residence.
However, during the refinancing process, they increased their mortgage to $1.3 million. In general, when refinancing, the portion of the new mortgage that is equal to or less than the original acquisition debt is still considered acquisition debt.
In this case, the outstanding mortgage balance before refinancing was $700,000. Therefore, the Starks' acquisition debt after the refinancing would be the original acquisition debt ($1 million) plus the amount of the mortgage increase that does not exceed the outstanding mortgage balance ($1.3 million - $700,000).
Calculating the acquisition debt:
Original acquisition debt: $1 million
Mortgage increase that does not exceed outstanding mortgage balance: $1.3 million - $700,000 = $600,000
Acquisition debt after the refinancing: $1 million + $600,000 = $1.6 million
Therefore, the Starks' acquisition debt after the refinancing is $1.6 million.