Javier and Anita Sanchez purchased a home on January 1, 2019, for $600,000 by paying $200,000 down and borrowing the remaining $400,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. The Sanchezes’ marginal tax rate is 32 percent.
Assuming the interest expense is their only itemized deduction for the year and that Javier and Anita file a joint return, have great eyesight, and are under 60 years of age, what is the after-tax cost of their 2019 interest expense?

The after-tax cost of their 2019 interest expense is $19,040

Explanation:

In order to calculate the after-tax cost of their 2019 interest expense we would have to calculate the following formula:

after-tax cost of their 2019 interest expense=Interest before tax expense-tax

Interest before tax expense=$400,000*7%

Interest before tax expense=$28,000

tax=$28,000*32%

tax=$8,960

after-tax cost of their 2019 interest expense=$28,000-$8,960

after-tax cost of their 2019 interest expense=$19,040

The after-tax cost of their 2019 interest expense is $19,040

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