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Exam 14: Tax Consequences of Home Ownership

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Question 1

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For a home to be considered a rental (nonresidence) property, a taxpayer must:

A) rent the property for 15 days or more during the year.
B) use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.
C) use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.
D) rent the property for 1 day or more during the year and use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.
E) rent the property for 15 days or more during the year and use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

F) A) and B)
G) A) and C)

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Question 2

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

A) True
B) False

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Question 3

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

A taxpayer who sells a principal residence that has been used as a rental propertyafter 2005 will not be allowed to exclude the portion of the gain attributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

Amanda purchased a home for $1,000,000 in 2016. She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in year 2022, when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing, paid off the first mortgage, and used the remainder for purposes unrelated to the home. What is her total amount of acquisition indebtedness forthe purposes of determining the deduction for home mortgage interest? (Assume not married filing separately.)

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?

Amelia is looking to refinance her home loan of $200,000. She has the option of (1)paying no discount points on the loan and paying interest at 7 percent or (2)paying 2 discount points on the loan and paying interest of 6 percent on the loan. Both options require Amelia to make interest-only payments for the first five years of the loan and pay back the loan over the 25 years after that (it is a 30-year loan). Amelia itemizes deductions irrespective of any interest expense she may pay. Amelia's marginal ordinary income tax rate is 32 percent. What is Amelia's break-even point in years? (For simplicity, ignore time value of money concerns.)

Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?

On July 1 of year 1, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%) . On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year. (Elaine was liable for the taxes because she owned the property when they became due.) What amount of real property taxes is Elaine allowed to deduct for year 1? (Assume not married filing separately.)

Tyson owns a condominium near Laguna Beach, California. In 2020, he incurs the following expenses in connection with his condo: (Round your intermediate and final answer to whole number.) During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assume Tyson uses the Tax Court method of allocating expenses to rental use of the property. Tyson itemizes deductions, and the sum of his itemized deduction for non-home business taxes and the real property taxes allocated to rental use of the home is less than $10,000. What is Tyson's net rental income for the year (assume this is not a leap 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 $20,040 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 $132,500. 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.

Patricia purchased a home on January 1, 2017, for $1,260,000 by making a down payment of $100,000 and financing the remaining $1,160,000 with a loan, secured by the residence, at 6 percent. From 2017 through 2020, Patricia made interest-only payments on the loaneach year in the amount of $69,600. What amount of the $69,600 interest expensethat Patricia paid during 2020 may she deduct as an itemized deduction? (Assume not married filing separately.)

Darren (single)purchased a home on January 1, 2016, for $470,000. Darren lived in the home as his primary residence until January 1, 2018, when he began using the home as a vacation home. He used the home as a vacation home until January 1, 2019. (He used a different home as his primary residence from January 1, 2018, to January 1, 2019.)On January 1, 2019, Darren moved back into the home and used it as his primary residence until January 1, 2020, when he sold the home for $540,500. What amount of the $70,500 gain Darren realized on the sale must he recognize for tax purposes in 2020?

Taxpayers with home offices who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible.

Kristen rented out her home for 10 days during the year for $5,000. She used the home for personal purposes for the other 355 days. She allocated the following home expenses to the rental use of the home: Kristen's AGI is $120,000 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?

A taxpayer may be required to include in gross incomethe gain the taxpayer realizes when she sells her principal residence.

In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (that is, they are limited to net Schedule C income before home office expenses).

On April 1, year 1, Mary borrowed $200,000 to refinance the original mortgage on 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. How much can Mary deduct in year 1 for her points paid?

Heidi (single)purchased a home on January 1, 2010, for $400,000. She lived in the home as her primary residence until January 1, 2018, when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2019. (She used a different home as her primary residence from January 1, 2018, to January 1, 2019.)On January 1, 2019, Heidi moved back into the home and used it as her primary residence until January 1, 2020, when she sold the home for $700,000. What amount of the $300,000 gain Heidi realized on the sale must she recognize for tax purposes in 2020?