ACC 4400 SB CH 14

Charlie and Lucy have a home in Louisville, Kentucky. During the week of the Kentucky Derby, Charlie and Lucy go on vacation and rent their home to a family who wants to attend the derby festivities and the races. Charlie and Lucy receive net rental income of $2,500 for the week. They spend about $500 to stock the bar and provide amenities for their tenants. Utilities, insurance, and interest expense for that week total $300. What is the amount of net rental income Charlie and Lucy will report from this transaction?

$0

Richard makes monthly house payments that include a pro rated portion of real property taxes and insurance. The taxes and insurance are held in an escrow account until the mortgage company pays the taxing jurisdiction. During the current year, Richard paid $1,800 into the escrow account. The tax bill paid by the mortgage company totaled $1,600. The excess $200 will remain in the escrow account and accumulate toward taxes for the following year. What amount can Richard deduct as real property taxes for the current year?

$1,600

The maximum amount of acquisition debt that can generate deductible interest expense for debt incurred before December 16, 2017 is ______________. (Please enter the number.)

1,000,000

A dwelling unit is considered to be a residence if the taxpayer's number of personal use days in the home is more than the greater of ___________ days or ____________ % of the days rented during the year.

14 10

A taxpayer is NOT required to report rental income or deduct rental expenses on a residence that is only rented for _____________ days or less, as long as the taxpayer lives in the home for at least _____________ days. (Enter your answers as numbers.)

14 15

The entire $25,000 deduction for rental real estate is phased out when the taxpayer's AGI reaches $_____________ .

150,000

Bob purchased a second home which he rented for 180 days this year. Assuming Bob does not plan to rent it the rest of the year, he must live in the home for at least __________ days during the remainder of the year in order for it to qualify as a residence.

19

To qualify for the exclusion on the sale of a personal residence, the taxpayer must have owned and used the property as his/her principal residence for a total of _________ ________ or more years during the ____________-year period ending on the date of sale.

2 5

Daniel and Debra have a principal residence in Ohio, but they also own residences in South Carolina and Colorado. None of the homes are rental property. For 2022, their total real property tax bills total $9,800. On how many of these homes can Daniel and Debra deduct the real property taxes?

3

When using the simplified method, the deduction for home office expenses is $ ___________ x business use square footage with a maximum deduction allowed of $____________. In addition to this amount, taxpayers are allowed to deduct _____________ percent of their mortgage interest and property tax as itemized deductions.

5 1500 100

Travis has a 2,400 square foot home. He is a sales representative for a pharmaceutical company and uses one room of his home exclusively for his business. The area of the office is 240 square feet. During the past year, he painted his office and replaced the door at a cost of $500; paid for utilities for his home, $3,000; paid property taxes, $1,500; paid mortgage interest, $3,600; and replaced a door jam and door for his patio, $600. Travis has $ ___________ in deductible direct expenses and $ ____________ in deductible indirect expenses.

500 810

Which of the following statements is INCORRECT regarding points charged on a home loan?

A point is 10 percent of the principal amount of the loan.

Which of the following statements is NOT correct regarding the deductibility of home mortgage interest?

A qualified residence must be the taxpayer's primary residence.

Which of the following statements are CORRECT when referring to a home that qualifies as a residence with significant rental use? (Check all that apply.)

All direct rental expenses such as advertising are fully deductible. The taxpayer rents the home for 15 days or more. All rental income is included in gross income.

Which of the following circumstances leading to failure in meeting the ownership and use tests would most likely NOT be considered a hardship that would allow the taxpayer to exclude a portion of the gain on the sale of the taxpayer's primary residence?

Change in marital status

Corey has a $1,200 home office deduction carryforward from the prior year. He has decided to use the simplified method for calculating the home office deduction in the current year. Which of the following statements is CORRECT regarding the home office deduction?

Corey cannot use the actual expense carryforward as a deduction in the current year if he is using the simplified method.

Which of the following statements is INCORRECT regarding a residence with significant rental use?

Direct rental expenses are allocated between personal and rental use.

What is the formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities?

Expense × (total rental days ÷ 365)

What is the formula used by the IRS when allocating mortgage interest and property taxes for residences with significant rental activities?

Expense × (total rental days ÷ total days used)

True or false: The loss on the sale of a principal residence is classified as a deductible capital loss.

False

True or false: When property is sold during the year, the buyer of the property is charged with paying the property tax on the real estate and receives the tax deduction for the payment.

False

Which of the following statements is INCORRECT regarding the treatment of revenues and expenses for a residence with significant rental use?

For tax purposes, rental expenses can NOT exceed rental revenues.

Ed owned and used his home in Kentucky as his principal residence for 15 years. He moved to another state in the 16th year and rented the Kentucky home. Two years later he sold the Kentucky home. Ed's brother, Fred, had two houses. Fred owned and used his home in Tennessee as his principal residence for 10 years. He had another home in Florida. In the 11th year, he moved into his Florida home. He resided there for 3 years and then sold the Florida home. Which of the brothers has "nonqualified use" of his principal residence that will reduce the exclusion on the gain on a sale of a personal residence?

Fred - because he moved into the home after a period of nonqualified use.

Which of the following rules for determining the basis of a personal residence is measured correctly?

Gift - the donor's basis

Which of the following statements regarding the simplified method of home office deduction is incorrect?

If a taxpayer has a prior year carryover and chooses to use this method, the carryover is lost forever.

Which of the following statements is INCORRECT regarding losses on rental activities?

In order to deduct a loss from a rental activity, the owner must be a material participant in the rental activity.

Which of the following rules for determining the basis of a personal residence is measured INCORRECTLY?

Inheritance - the basis carries over from the deceased owner

What type of nonbusiness interest is deductible?

Interest on acquisition indebtedness

Which of the following statements are correct regarding the deductibility of home mortgage interest? (Check all that apply.)

Interest on home-equity indebtedness is only deductible if it is used for home improvements. A taxpayer can deduct interest on up to two qualified residences. The loan must be secured by the residence.

In each of the following scenarios, assume that the five-year period prior to the sale begins on January 1, 2017 and that Judy is using the home as her primary residence when she is living there. In which one of the following situations will Judy NOT be subject to the nonqualified use provisions that reduce the nontaxable portion of her gain?

Judy used the home as her primary residence in the first two years. She moved and rented the home for two and a half years before selling it.

Jason owns a house and property in Ogden, Utah. He does NOT live in the home now, but plans to retire there. He is able to rent the house to sports enthusiasts and their families throughout most of the year. Skiers like to stay in the winter months and hikers like to rent the house in the summer months. Which type of dwelling unit is this house for Jason?

Nonresidence

ason owns a house and property in Ogden, Utah. He does NOT live in the home now, but plans to retire there. He is able to rent the house to sports enthusiasts and their families throughout most of the year. Skiers like to stay in the winter months and hikers like to rent the house in the summer months. Which type of dwelling unit is this house for Jason?

Nonresidence

Which of the following statements are correct regarding acquisition indebtedness? (Check all that apply.)

Principal payments on the loan reduce acquisition indebtedness. Acquisition indebtedness can be increased by additional debt used to substantially improve the residence.

Julia owns a house and property in Salt Lake City, Utah and another house in Florida. She stays in Florida for about three months a year and stays in Utah the other nine months. Julia is a consultant. Her employer and office are located in Utah, but she is able to work remotely when she is in Florida. What type of dwelling unit is the Utah home to Julia?

Principal residence

Which of the following statements is correct regarding real property taxes? (Check all that apply.)

Real property taxes are deductible either for or from AGI depending on the use of the real property. The maximum real property tax amount that may be taken as an itemized deduction is $10,000 for a married couple that files jointly.

Which of the following choices can be considered a dwelling unit? (Check all that apply.)

Recreational vehicle (camper) Mobile home Houseboat Condominium

Jacki owns a house that is considered a nonresidence for tax purposes. She lived in the house for 10 days and rented it out for 250 days during the year. Which of the following statements are correct? (Check all that apply.)

Rental expense deductions for the property are NOT limited to gross income. Any loss on the property is considered a passive loss.

Sandy owns a 2-bedroom house with a living room, 2 bathrooms, a kitchen/dinette, and a basement. Which of the following qualify for a home-office deduction? (Check all that apply.)

Sandy uses her basement as a photo developing lab and framing area for her photography business. Sandy has turned the second bedroom into her office for billing and bookkeeping related to her business. She replaced the bedroom furniture with office furniture.

Jack and Susan sold their principal residence for $240,000. They had paid $200,000 four years earlier. How will this transaction be treated for tax purposes?

The $40,000 gain is excluded from taxation because it results from the sale of a principal residence.

When a taxpayer has more than one business location, including the home, how can he determine which location is the principal place of business? (Check all that apply.)

The effort spent on administrative or management activities if there is NOT another location for that purpose The total time spent doing work at each location The relative importance of the activities performed at each business

Drake purchased a second home this year. He lived in the home for 12 days and rented the home for 70 days. Which of the following statements is correct?

The home is NOT a residence. Drake did not use the residence for more than the greater of 14 days or 10% of rental days.

Which of the following days are counted as rental days for a dwelling unit? (Check all that apply.)

The home is being repaired for rental use. A friend of the taxpayer stays in the home and pays a fair market rental rate.

When a taxpayer rents his residence to unrelated parties for 15 or more days, how is the rental activity treated?

The owner includes the income and deducts the rental expenses to the extent of the rent income. Losses are NOT allowed unless due to Tier 1 expenses.

Rachel owns a house and property in Ogden, Utah. She does NOT live in the home continuously, but she spends about 28 days there in the winter and another 28 days there in the summer. She is able to rent the house to sports enthusiasts and their families for 280 days of the year. Skiers like to stay in the winter months and hikers like to rent the house in the summer months. Which type of dwelling unit is this house for Rachel?

The property is a residence, but NOT her principal residence.

Real property taxes are often assessed on the value of the property at the beginning of the year. When property is sold in the middle of year, who receives the deduction for the real property tax?

The property tax is pro rated at the time of the transfer, so both the buyer and seller can deduct their pro rated portion of the property tax.

Which of the following facts would NOT necessarily be taken into consideration when trying to determine which of two residences is the principal residence of the taxpayer?

The proximity of each residence to the taxpayer's close friends

Which of the following statements is FALSE regarding the deductibility of home office expenses?

The taxpayer can claim a home office deduction if he uses a portion of the home to meet with clients over the phone or through email.

Which of the following days are counted as personal use days for a dwelling unit? (Check all that apply.)

The taxpayer or other owner resides in the unit. A relative of an owner stays in the home for free. A friend of the taxpayer stays in the home and pays a below market rental rate. A relative of an owner stays in the home and pays a fair market rental rate.

Which of the following statements is INCORRECT concerning the ownership and use tests used to qualify for the exclusion of a gain on the sale of a personal residence?

The time of ownership and use must be a continuous two-year period.

Match the rental expenses to the appropriate tiers.

Tier 1 --> Expenses to obtain tenants Tier 2 --> Operating expenses for the rental property Tier 3 --> Depreciation on the rental property

Match the type of expense to the appropriate tier for the purpose of the home office deduction.

Tier 1 --> Generally, mortgage interest and real property tax allocated to the business Tier 2 --> Generally, expenses allocated to the business use of the home except for interest, taxes, and depreciation Tier 3 --> Depreciation allocated to the business

Which of the following statements is INCORRECT regarding the home office deduction when using the actual expense method?

Tier 1 expenses are deductible to the extent of the Schedule C net income before considering the home office deduction.

Travis has a 2,400 square foot home. He is a sales representative for a pharmaceutical company and uses one room of his home exclusively for his business. The area of the office is 240 square feet. During the past year, he painted his office and replaced the door at a cost of $500; paid for utilities for his home, $3,000; paid property taxes, $1,500; paid mortgage interest, $3,600; and replaced a door jamb and door for his patio, $600. Depreciation expense on the entire home would be $2,000 for the year. If Travis uses the simplified method for deducting home office expenses, which of the following choices are correct? (Check all that apply.)

Travis has a simplified method deduction of $5 x 240 square feet. Travis is allowed to deduct 100% of his mortgage interest and property tax as itemized deductions.

True or false: A taxpayer's principal place of business can also include the place of business used by the taxpayer for the management activities of the trade or business, if there is no other business location provided for that purpose.

True

True or false: If a taxpayer stays in his rental property for even one day, the expenses must be allocated between rental and personal days.

True

When are real property taxes deductible for the taxpayer?

When the tax payment is made from the escrow account to the taxing authority

Any debt secured by a qualified residence that is incurred in purchasing, constructing, or substantially improving the residence is called ________ ________ .

acquisition indebtedness

Points paid in connection with ____________ of the taxpayer's principal residence are deductible immediately, but points paid to __________ the home are amortized and deducted over the life of the loan.

acquisition refinance

Although losses from rental property are classified as passive losses, there is an exception that allows a taxpayer who is a(n) ____________ participant in a rental activity to deduct up to $__________ of the rental loss against nonpassive income.

active 25,000

Expenses included in the home office deduction, such as painting or repairs to the actual area of the home used for business, are referred to as __________ expenses, while the costs that are incurred for the use of the home such as utilities, property taxes, and depreciation are referred to as ______________ expenses.

direct indirect

When a taxpayer rents his residence to unrelated parties for 14 or fewer days and lives in the residence for at least 15 days, her or she Blank______.

does NOT report any rental income and is not allowed to deduct any rental expenses

In order for a place to be considered a(n)__________ __________ , people must be able to live and sleep there.

dwelling unit

Jack and Diane have their principal residence in Kansas. They operate a small retail business in town and they own the building that is used for their shop. In addition, they have an apartment building with 15 units. Jack and Diane paid real property taxes on each of these three buildings. The real property tax is a deduction __________ (for/from) AGI on their principal residence, ______________ (for/from) AGI on their retail shop, and ____________ (for/from) AGI on their rental property.

from for for

When a taxpayer owns a home that he does not live in, the home is considered to be a(n) ______________ property for tax purposes. If he rents the property at fair market value, any loss is _____________ (deductible/nondeductible) for tax purposes. (Enter only one word per blank.)

nonresidence deductible

A(n) _________ is 1 percent of the principal amount of the loan that is deductible when paid to the lender in exchange for a reduced __________ __________ on loans.

point interest rate

When a taxpayer lives in more than one residence during the year, she will have to distinguish which one is her _________ _______ based on time spent there, proximity to her job, living arrangements of her immediate family, and where her bills are mailed.

principal residence

In order to qualify for home office deductions, a taxpayer must use part of his home _________ and ________ as either a principal place of business or as a place to meet with clients in the normal course of business. (Enter only one word per blank.)

regularly exclusively

If a taxpayer is UNABLE to meet the two-year requirement for the ownership and use tests due to ____________ circumstances, he can exclude a percentage of the gain based on the time he owned and used the home.

unusual