Chapter 14

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 (1)% of the direct expenses of her basement studio and (2)% of the indirect costs from maintaining and using her home as a home office deduction. (Enter your answers as whole numbers.)

1. 100 2. 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 (1) days or (2)% of the days rented during the year.

1. 14 2. 10

A taxpayer is NOT required to report rental income or deduct rental expenses on a residence that is only rented for (1) days or less, as long as the taxpayer lives in the home for at least (2) days. (Enter your answers as numbers.)

1. 14 2. 15

The entire $25,000 deduction for rental real estate is phased out when the taxpayer's AGI reaches $(1).

1. 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 (1) days during the remainder of the year in order for it to qualify as a residence.

1. 18

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 (1) or more years during the (2)-year period ending on the date of sale.

1. 2 2. 5

When using the simplified method, the deduction for home office expenses is $(1) x business use square footage with a maximum deduction allowed of $(2). In addition to this amount, taxpayers are allowed to deduct (3) percent of their mortgage interest and property tax as itemized deductions.

1. 5 2. 1500 3. 100

Any debt secured by a qualified residence that is incurred in purchasing, constructing, or substantially improving the residence is called (1) (2).

1. acquisition 2. indebtedness

Points paid in connection with (1) of the taxpayer's principal residence are deductible immediately, but points paid to (2) the home are amortized and deducted over the life of the loan.

1. buying 2. refinance

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 (1) expenses, while the costs that are incurred for the use of the home such as utilities, property taxes, and depreciation are referred to as (2) expenses.

1. direct 2. indirect

In order for a place to be considered a(n) (1) (2), people must be able to live and sleep there.

1. 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 (1) (for/from) AGI on their principal residence, (2) (for/from) AGI on their retail shop, and (3) (for/from) AGI on their rental property.

1. from 2. for 3. for

A(n) (1) is 1 percent of the principal amount of the loan that is deductible when paid to the lender in exchange for a reduced (2) (3) on loans.

1. point 2. interest 3. rate

In order to qualify for home office deductions, a taxpayer must use part of his home (1) and (2) 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.)

1. regularly 2. exclusively

When a taxpayer owns a home that he does not live in, the home is considered to be a(n) (1) property for tax purposes. If he rents the property at fair market value, any loss is (2) (deductible/nondeductible) for tax purposes. (Enter only one word per blank.)

1. rental 2. deductible

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 ______.

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

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

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 2020, 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

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.

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

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

Select all that apply 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.)

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

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

Condominium Mobile home Recreational vehicle (camper) Houseboat

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.

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

Select all that apply 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, 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 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

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

Select all that apply 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. 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.

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

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?

The $15,000 loss is NOT deductible because it results from the sale of a personal use asset.

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.

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 exclusion of the gain on the sale of a personal residence can only be used once every five years.

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?

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.

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.

Select all that apply 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.

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.

Select all that apply 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.)

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

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

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: Mortgage interest and real property tax allocated to the business Tier 2: Expenses allocated to the business use of the home except for interest, taxes, and depreciation Tier 3: Depreciation allocated to the business

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

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

When are real property taxes deductible for the taxpayer?

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

Regarding the deductibility of home office expenses, a taxpayer CANNOT claim a home office deduction if ______.

the space is used for both business and personal purposes