In year 1, kris purchased a new home for $200,000 by making a down payment of $150,000 and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. as of january 1, year 4, the outstanding balance on the loan was $40,000. on january 1, year 4, when his home was worth $300,000, kris refinanced the home by taking out a $150,000 mortgage at 5 percent. with the loan proceeds, he paid off the $40,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. during year 4, he made interest only payments on the new loan of $7,500. what amount of the $7,500 interest expense on the new loan can kris deduct in year 4 on the new mortgage as home related interest expense?

a. $2,000
b. $5,000
c. $7,000
d. $7,500