1. Describe the tax treatment of the interest paid by cash-basis taxpayers in each of the following situations:
a. Billie and Sue purchased a principal residence on December 31, 2017 for $1.4 million, paying $225,000 in cash and financing the balance with a mortgage.
b. Taylor takes out a loan of $100,000 on February 15, 2014, and uses the proceeds to buy a residential building lot, which serves as security for the debt. On January 5, 2015, Taylor begins construction of a house on the lot. He completes construction on December 28, 2015 (having spent $300,000, excluding the lot), and moves into the house as his principal residence on New Years Eve of that year. On March 1, 2017, Taylor obtains a mortgage loan for $350,000, secured by the residence. The lender pays off the initial $100,000 debt and disburses the remaining $250,000 to Taylor.