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Exam 14: Tax Consequences of Home Ownership

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Question 1

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Which of the following statements regarding deductions for real property taxes is incorrect?

A) A taxpayer is allowed to immediately deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.
B) Taxpayers are not allowed to deduct payments made for setting up water and sewer services.
C) An individual deducts real property taxes on her principal residence as a from AGI deduction.
D) Taxpayers are not allowed to deduct payments made for repairs to neighborhood sidewalks.

E) B) and C)
F) A) and C)

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Question 2

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Ethan (single) purchased his home on July 1,2009.He lived in the home as his principal residence until July 1,2016,when he moved out of the home,and rented it out until July 1,2018,when he moved back into the home.On July 1,2019,he sold the home and realized a $210,000 gain.What amount of the gain is Ethan allowed to exclude from his gross income?

A) $0.
B) $168,000.
C) $200,000.
D) $210,000.

E) None of the above
F) A) and B)

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Question 3

Multiple Choice

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On March 31,year 1,Mary borrowed $200,000 to buy her principal residence.Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent.The loan is for a 30-year period.What is Mary's year 1 deduction for her points paid?

When a taxpayer rents a residence for part of the year,the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer's:

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for more than 14 days during the year is ineligible to deduct any home mortgage interest expense on a loan secured by the home.

Jessica purchased a home on January 1,2019,for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan,secured by the residence,at 6 percent.During 2019 and 2020,Jessica made interest-only payments on this loan of $18,000 (each year) .On July 1,2019,when her home was worth $500,000,Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent.During 2019,she made interest-only payments on the second loan in the amount of $5,000.During 2020,she made interest-only payments on the second loan in the amount of $10,000.What is the maximum amount of the $28,000 interest expense Jessica paid during 2020 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

Taxpayers with high AGI are not allowed to deduct home mortgage interest expense.

Harvey rents his second home.During the year,Harvey reported a net loss of $35,000 from the rental.If Harvey is an active participant in the rental and his AGI is $80,000,how much of the loss can he deduct against ordinary income for the year?

Don owns a condominium near Orlando,California.This year,he incurs the following expenses in connection with his condo: During the year,Don rented the condo for 70 days and he received $17,400 of rental receipts.He did not use the condo at all for personal purposes during the year.Don is considered to be an active participant in the property.Don's AGI from all sources other than the rental property is $140,000.Don does not have passive income from any other sources.What is Don's AGI?

To be allowed to exclude gain on the sale of a principal residence,the taxpayer selling the home must be using the home as a principal residence at the time of the sale.

Braxton owns a second home that he rents to others.During the year,he used the second home for 50 days for personal use and for 100 days for rental use.After allocating the home-related expenses between personal use and rental use,which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants) ?

Expenses of a vacation home allocated to rental use are deductible for AGI.

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day.Jennifer is required to allocate expenses associated with the home between rental and personal use.

Brady owns a second home that he rents to others.During the year,he used the second home for 50 days for personal use and for 100 days for rental use.Brady collected $20,000 of rental receipts during the year.Brady allocated $7,000 of interest expense and property taxes,$10,000 of other expenses,and $4,000 of depreciation expense to the rental use.What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year,if any?

At most,a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.

In order to be eligible to exclude gain on the sale of a principal residence,the taxpayer must meet which of the following test(s) ?

The amount of a taxpayer's itemized deduction for all taxes combined,including state income taxes and real property taxes,is limited to $10,000 ($5,000 if married filing separately).

A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.

In year 1,Abby 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 her home was worth $300,000,Abby refinanced the home by taking out a $120,000 mortgage at 5 percent.With the loan proceeds,she paid off the $40,000 balance of the existing mortgage and used the remaining $80,000 for purposes unrelated to the home.During year 4,she made interest-only payments on the new loan of $6,000.What amount of the $6,000 interest expense on the new loan can Abby deduct in year 4 on the new mortgage as home-related interest expense?