Individual Income Tax Ch. 14

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense? a.) Only the taxpayer's principal residence. b.) The taxpayer's principal residence and two other residences (chosen by the taxpayer). c.) The taxpayer's principal residence and one other residence (chosen by the taxpayer). d.) Any two residences chosen by the taxpayer.

c.) The taxpayer's principal residence and one other residence (chosen by the taxpayer).

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)? a.) Rental test b.) Use test c.) Ownership test d.) Business use test e.) Ownership and use test

e.) Ownership and use test

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 2021 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 her amount of acquisition indebtedness for purposes of determining the deduction for home mortgage interest? (Assume not married filing separately.) a.) $600,000 b.) $750,000 c.) $1,000,000 d.) $1,100,000

a.) $600,000 $600,000 is the acquisition indebtedness. Refinancing the loan does not change the acquisition indebtedness.

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? a.) $200 b.) $150 c.) $4,500 d.) $6,000

b.) $150 $6,000/360 months × 9 months = $150.

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? a.) $0 b.) $2,000 c.) $5,000 d.) $6,000

b.) $2,000 Only $40,000 (one-third) of the new loan is acquisition indebtedness so only one third of the interest is deductible.

Larry owned and lived in a home for five years before marrying Darlene. Larry and Darlene lived in the home for one year before selling it at a $600,000 gain. Larry was the sole owner of the residence until it was sold. How much of the gain may Larry and Darlene exclude? a.) $0 b.) $250,000 c.) $500,000 d.) $600,000

b.) $250,000 Because Darlene didn't meet the two year use test, the couple qualifies for the $250,000 exclusion not the $500,000 exclusion.

Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct? a.) A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale. b.) A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion. c.) A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion. d.) For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.

b.) A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.

Which of the following statements regarding deductions for real property taxes is correct? a.) Real property taxes paid on an individual's personal residence are deductible as for AGI deduction. b.) Taxpayers may deduct as an itemized deduction up to $10,000 (unless married filing separately) all taxes combined (including state income taxes and real property taxes). c.) Taxpayers are not allowed to deduct real property taxes. d.) None of these statements are correct.

b.) Taxpayers may deduct as an itemized deduction up to $10,000 (unless married filing separately) all taxes combined (including state income taxes and real property taxes).

Patrick purchased a home on January 1, year 2018 for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 6 percent. During 2018, Patrick made interest-only payments on the loan of $30,000. On July 1, 2018, when his home was worth $600,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent. During 2018, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expense Patrick paid during 2018 may he deduct as an itemized deduction if he used the $75,000 from the July 1 loan to purchase a car? a.) $0 b.) $3,000 c.) $30,000 d.) $33,000

c.) $30,000 Because the amount of home acquisition indebtedness is under $750,000, he may deduct all the interest on the $600,000 loan. However, because he did not use the second loan proceeds to substantially improve his home so he is not allowed to deduct the interest on the $75,000 loan.

On November 1, year 1, Jamie (who is single) purchased and moved into her principal residence. In the early part of year 2, Jamie was laid off from her job. On February 1, year 2, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in year 2? a.)$0 b.) $3,125 c.) $31,250 d.) $35,000

c.) $31,250 Maximum exclusion is $250,000 × 3/24 = $31,250.

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.) a.) $0 b.) $4,000 c.) $4,500 d.) $5,000 e.) $9,000

c.) $4,500 Elaine is allowed to deduct taxes only for the portion of the year she owned the home. Because she owned the home for half a year she can deduct half of the taxes even though she paid all of the taxes

Shantel owned and lived in a home for five years before marrying Daron. Shantel and Daron lived in the home for two years before selling it at a $700,000 gain. Shantel was the sole owner of the residence until it was sold. How much of the gain may Shantel and Daron exclude? a.) $0 b.) $250,000 c.) $500,000 d.) $700,000

c.) $500,000 Because Shantel meets the ownership test and both Shantel and Daron meet the use test requirement, the couple may exclude $500,000 of gain.

Patricia purchased a home on January 1, 2017 for $1,200,000 by making a down payment of $100,000 and financing the remaining $1,100,000 with a 30-year loan, secured by the residence, at 6 percent. During year 2017 and 2018, Patricia made interest-only payments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during 2018 may she deduct as an itemized deduction? (Assume not married filing separately.) a.) $0 b.) $6,000 c.) $60,000 d.) $66,000

c.) $60,000 For loans occurring before December 16, 2017, interest on up to $1,000,000 of acquisition debt is deductible. In 2018, interest on home equity indebtedness is not deductible. Here all the debt is acquisition indebtedness and she may deduct interest on $1,000,000 of the $1,100,000 debt.

Which of the following statements regarding the home mortgage interest expense deduction is false for a single taxpayer? a.) Taxpayers who may deduct all of the interest paid on up to $1,000,000 of acquisition debt if the debt occurred in January of 2017. b.) Taxpayers may deduct all of the interest paid on up to $750,000 of acquisition debt if the debt occurred in January of 2018. c.) If, in 2018, a taxpayer refinances acquisition debt that was originally incurred in January of 2017, the taxpayer may deduct the interest on up to only $750,000 of the refinanced loan. d.) None of the choices are false.

c.) If, in 2018, a taxpayer refinances acquisition debt that was originally incurred in January of 2017, the taxpayer may deduct the interest on up to only $750,000 of the refinanced loan.

Serena is single. She purchased her principal residence three years ago. She lived in the home until she sold it at a $300,000 gain this year. Serena was allowed to exclude $250,000 of the $300,000 gain. What is the character of the $50,000 gain she was not able to exclude? a.) Ordinary income/gain. b.) Short-term capital gain. c.) Long-term capital gain. d.) Personal gain. e.) None of the choices are correct.

c.) Long-term capital gain.

What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income? a.) $0 b.) $25,000 c.) $250,000 d.) $500,000

d.) $500,000

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? a.) $50 b.) $150 c.) $4,500 d.) $6,000

d.) $6,000 $200,000 × 3% = $6,000.

Which of the following statements regarding a taxpayer's principal residence is true for purposes of determining whether the taxpayer is eligible to exclude gain realized on the sale of the residence? a.) A taxpayer may have more than one principal residence at any one time. b.) A taxpayer's principal residence may not be a houseboat. c.) A taxpayer with more than one residence may annually elect which residence is considered to be the principal residence. d.) None of these statements is true.

d.) None of these statements is true.

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.) personal use of the home exceeds the taxpayer's rental use of the home. b.) personal use of the home exceeds half of the taxpayer's rental use of the home. c.) personal use of the home exceeds the lesser of 14 days or 10 percent of the taxpayer's rental use of the home. d.) personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.

d.) personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.