Chapter 14

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

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 a. $2,200 b. $0 c. $2,500 d. $2,000 e. $1,800

B

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.) a. The number of employees that work at the other locations b. The relative importance of the activities performed at each business c. The effort spent on administrative or management activities if there is NOT another location for that purpose d.The total time spent doing work at each location e. The relative sizes of the various locations

B, C, D

The maximum amount of acquisition debt that can generate deductible interest expense for debt incurred before December 16, 2017 is $________.

1,000,000

Sharon has a 2,800 square foot home with an additional 1,200 square foot basement. She is an artist and uses the basement exclusively as her painting studio. Sharon can deduct ___% of the direct expenses of her basement studio and ___% of the indirect costs from maintaining and using her home as a home office deduction

100, 30

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 ___% pf the days rented during the year.

14, 10

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 2019, their total real property tax bills total $9,800. On how many of these homes can Daniel and Debra deduct the real property taxes? a. 0 b. 2 c. 1 d. 3

3

Which of the following statements are correct regarding acquisition indebtedness? (Check all that apply.) a. Deductible interest can NOT exceed interest on $750,000 in acquisition indebtedness for debt incurred before December 16, 2017. b. Acquisition indebtedness can be increased by additional debt used to substantially improve the residence. c. Deductible interest can NOT exceed interest on $1,000,000 in acquisition indebtedness for debt incurred after December 15, 2017. d. Principal payments on the loan reduce acquisition indebtedness.

B, D

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.) a. All rental deductions are limited to gross rental revenue. b. All rental income is included in gross income. c. 100% of the interest and taxes on the property are deducted as itemized deductions. d. The taxpayer rents the home for 15 days or more. e. The taxpayer uses the home personally for more than the greater of 14 days or 20% of the days rented. f. All direct rental expenses such as advertising are fully deductible.

B, D, F

Which of the following days are counted as rental days for a dwelling unit? (Check all that apply.) a. A nonowner stays in the unit as the result of a vacation-swap arrangement. b. A friend of the taxpayer stays in the home and pays a fair market rental rate. c. A relative of an owner stays in the home and pays a fair market rental rate. d. A friend of the taxpayer stays in the home and pays a below market rental rate. e. The home is available for rent, but is NOT actually rented out. f. The home is being repaired for rental use.

B, F

Which of the following days are counted as rental days for a dwelling unit? (Check all that apply.) a. A nonowner stays in the unit as the result of a vacation-swap arrangement. b. A friend of the taxpayer stays in the home and pays a fair market rental rate. c. A relative of an owner stays in the home and pays a fair market rental rate. d. A friend of the taxpayer stays in the home and pays a below market rental rate. e. The home is available for rent, but is NOT actually rented out. f. The home is being repaired for rental use.

B, F

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? a. Residence, but NOT principal residence b. Commercial residence c. Nonresidence d. Principal residence

D

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? A. The taxpayer who actually pays the real property tax or has it paid from his escrow account. B. The taxpayer who has owned the property for the largest portion of the year is allowed to deduct the property tax. C. The taxpayer who owned the property at the beginning of the year (the assessment date). D. 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.

D

Which of the following rules for determining the basis of a personal residence is measured INCORRECTLY? a. Converted property (from rental home to residence) - the taxpayer's basis in the home at the time of conversion b. Gift - the donor's basis c. Purchase - the cost of the home to the taxpayer d. Inheritance - the basis carries over from the deceased owner

D

T/F: 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

T/F: 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

T/F: If a taxpayer stays in his rental property for even one day, the expenses must be allocated between rental and personal days

True

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 propertyJACK

from, for, for

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.

regularly, exclusively

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? a. Fred - because he moved into the home after a period of non-qualified use. b. Ed - because he moved out of his house and had a new principal residence for the last two years. c. Neither Ed nor Fred - Both brothers meet the ownership and use tests because they owned and used the property for 2 of the 5 years before the sale. d. Both Ed and Fred - During the 5 year period preceding the sale, both brothers had principal residences other than the homes they sold.

A

In each of the following scenarios, assume that the five-year period prior to the sale begins on January 1, 2013 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 non-qualified use provisions that reduce the nontaxable portion of her gain? a. 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. b. Judy lived in the home for one year. She moved away for two years, then moved back into the home before selling it a year and a half later. c. Judy used the house as a vacation home for the first two and a half years. She used it as her primary residence for the last two years. d. The home was rental property for the first year. Judy then used it as her primary residence for three years. She sold the home one year later.

A

What type of nonbusiness interest is deductible? a. Interest on acquisition indebtedness b. Interest on unsecured line of credit c. Interest on automobile loans d. Interest on credit card debt

A

When are real property taxes deductible for the taxpayer? a. When the tax payment is made from the escrow account to the taxing authority b. When the tax payments are made by the taxpayer to the escrow account c. When the taxes are due, regardless of when they are paid d. When the taxes are billed, regardless of when they are paid

A

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? a. The proximity of each residence to the taxpayer's close friends b. The principal place of abode of the taxpayer's immediate family c. The proximity of each residence to the taxpayer's job d. The taxpayer's mailing address for bills and important correspondence

A

Which of the following statements is NOT correct regarding the deductibility of home mortgage interest? a. A qualified residence must be the taxpayer's primary residence. b. For mortgage debt incurred after December 15, 2017, taxpayers are limited to $750,000 (married filing jointly) for acquisition indebtedness. c. Home-equity interest is deductible if the proceeds are used to substantially improve the home. d. The loan must be secured by the residence.

A

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.) a. Rental expense deductions for the property are NOT limited to gross income. b. Any loss on the property is considered a passive loss. c. The personal percentage of real property taxes and mortgage interest are deductible as itemized deductions. d. For tax purposes, Jacki may disregard the 10 days she lived in the house since personal use did not exceed 14 days.

A, B

Which of the following choices can be considered a dwelling unit? (Check all that apply.) a. Mobile home b. Recreational vehicle (camper) c. Minivan d. Motel room e. Condominium f. Houseboat

A, B, E, F

Which of the following days are counted as personal use days for a dwelling unit? (Check all that apply.) a. A friend of the taxpayer stays in the home and pays a below market rental rate. b. The home is available for rent, but is NOT actually rented out. c. A friend of the taxpayer stays in the home and pays a fair market rental rate. d. A relative of an owner stays in the home and pays a fair market rental rate. e. The taxpayer or other owner resides in the unit. f. A relative of an owner stays in the home for free.

A, D, E, F

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? a. Corey will lose the carry-forward for all future years if he uses the simplified method in the current year. b. Corey cannot use the actual expense carry-forward as a deduction in the current year if he is using the simplified method. c. Corey can use the carry-forward in the current year as long as he used the simplified method in the prior year. d. Corey cannot switch to the simplified method if he used the actual expense method in the prior year.

B

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? a. The property is a nonresidence. b. The property is a residence, but NOT her principal residence. c. The property is Rachel's principal residence. d. The property is a commercial residence.

B

When a taxpayer rents his residence to unrelated parties for 14 or fewer days, and the taxpayer lives in the residence for at least 15 days, how is the rental activity treated? a. The owner includes the rental income and deducts the rental expenses. If the result is a rental loss, it can offset ordinary income. b. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental. c. The owner includes the rental income, but is not allowed to deduct the rental expenses. d. The owner includes the rental income and deducts the rental expenses to the extent of the rental income. Losses are disallowed for tax purposes.

B

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? a. The principal place of abode of the taxpayer's immediate family b. The proximity of each residence to the taxpayer's close friends c. The taxpayer's mailing address for bills and important correspondence d. The proximity of each residence to the taxpayer's job

B

Which of the following rules for determining the basis of a personal residence is measured correctly? a. Purchase - the current fair market value of the home to the taxpayer b. Gift - the donor's basis c. Inheritance - the basis carries over from the deceased owner d. Converted property (from rental home to residence) - the taxpayer's original cost of the home

B

Which of the following statements is FALSE regarding the deductibility of home office expenses? a. An employee cannot claim a home office deduction even if the home office is for the convenience of the employer. b. 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. c. A taxpayer can NOT claim a home office deduction if the space is used for both business and personal purposes. d. The taxpayer can claim a home office deduction regardless of whether she owns her home or rents her home.

B

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? a. For married couples to get the $500,000 exclusion, both must have used the house for 2 years, but only one has to have owned the home for 2 years. b. The exclusion of the gain on the sale of a personal residence can only be used once every five years. c. For a widow or widower, the surviving spouse is entitled to a $500,000 exclusion if the sale takes place within two years after the date of death. d. The time of ownership and use must be two years out of the last five years, but it does NOT have to be a continuous two-year period.

B

Which of the following statements is INCORRECT regarding a residence with significant rental use? a. The expenses allocated to personal use are NOT deductible except for real property tax and mortgage interest. b. Direct rental expenses are allocated between personal and rental use. c. If rental expenses exceed rental revenue, the loss is NOT deductible unless it is due to Tier 1 expenses. d. Expenses relating to the home are allocated between personal and rental use.

B

Which of the following statements is INCORRECT regarding losses on rental activities? a. Up to $25,000 in losses from rental activities may be used to offset non-passive income. b. In order to deduct a loss from a rental activity, the owner must be a material participant in the rental activity. c. The maximum exception amount for active owners starts phasing out for taxpayers with AGI in excess of $100,000. d. Rental losses are classified as passive losses.

B

Which of the following statements is INCORRECT regarding the home office deduction when using the actual expense method? a. Tier 3 expenses are deductible to the extent that the Schedule C net income exceeds both the tier 1 and tier 2 expenses. b. Tier 1 expenses are deductible to the extent of the Schedule C net income before considering the home office deduction. c. Any expense that is NOT deductible in the current year due to the net income limitations can be carried forward to future years. d. Tier 2 expenses are deductible to the extent that the Schedule C net income exceeds the tier 1 expenses.c

B

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.) a. Travis may deduct the full $1,500 maximum allowed under the simplified method because he has direct expenses for the home office. b. Travis has a simplified method deduction of $5 x 240 square feet. c. Travis is allowed to deduct 100% of his mortgage interest and property tax as itemized deductions. d. If Travis chooses to use the simplified method this year, he must also use it for all future years.

B, C

Daniel, a single taxpayer, was given a house by his parents several years ago. He has used the home as his principal residence since it was given to him. Daniel's basis in the home was only $65,000. Due to the expansion of the city, he was able to sell the house for $320,000. How will this transaction be treated for tax purposes? a. The $255,000 gain is excluded from taxation because it qualifies as a primary residence. b. The $255,000 gain is classified as a long-term capital gain taxed at preferential rates. c. The first $250,000 of the gain can be excluded and the remaining $5,000 gain will be treated as a long-term capital gain. d. The first $250,000 of the gain can be excluded and the remaining $5,000 gain will be treated as ordinary income.

C

Denis and Debbie sold their principal residence for $240,000. They had paid $255,000 four years earlier. How will this transaction be treated for tax purposes? a. The $15,000 loss is classified as a casualty loss due to the decline in fair market value of the home. b. The $15,000 loss is an ordinary loss that can be used to offset ordinary income. c. The $15,000 loss is NOT deductible because it results from the sale of a personal use asset. d. The $15,000 loss is a capital loss that can be used to offset capital gains or can be carried forward to future years.

C

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? a. $1,800 b. $0 c. $1,600 d. $200

C

When a taxpayer rents his residence to unrelated parties for 15 or more days, how is the rental activity treated? a. The owner includes the rental income, but is NOT allowed to deduct the rental expenses. b. The owner includes the rental income and deducts the rental expenses. If the result is a rental loss, it can offset ordinary income. c. 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. d. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental.

C

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? a. The taxpayer must have owned the property for at least two years during the five-year period ending on the date of the sale. b. The exclusion of the gain on the sale of a personal residence can only be used once every two years. c. The time of ownership and use must be a continuous two-year period. d. For a widow or widower, the surviving spouse is entitled to a $500,000 exclusion if the sale takes place within two years after the date of death.

C

Which of the following statements is INCORRECT regarding the treatment of revenues and expenses for a residence with significant rental use? a. Tier 3 expenses are deductible to the extent that the gross rental revenues exceed both the tier 1 and tier 2 expenses. b. Tier 2 expenses are deductible to the extent that the gross rental revenues exceed the tier 1 expenses. c. For tax purposes, rental expenses can NOT exceed rental revenues. d. Tier 1 expenses are fully deductible.

C

Which of the following statements regarding the simplified method of home office deduction is incorrect? a. Disallowed expenses under the simplified method cannot be carried forward to the following year. b. The expense is calculated by multiplying the square footage by the $5 application rate. c. If a taxpayer has a prior year carryover and chooses to use this method, the carryover is lost forever. d. Use of the method cannot result in a Schedule C net loss.

C

Which of the following statements is correct regarding real property taxes? (Check all that apply.) a. Real property taxes are deductible as an itemized deduction to the extent they exceed 7.5% of AGI. b. Real property taxes are only deductible if the real property is used in a trade or business or is rental property. c. Real property taxes paid by an individual on a personal residence are limited as an itemized deduction to no more than $10,000 per taxpayer per year. d. Real property taxes are deductible for a taxpayer's primary residence and one additional residence regardless of the number of residences owned. e. Real property taxes are deductible either for or from AGI depending on the use of the real property.

C, F

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

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

dwelling unit