chapter 14 acct 311

Cameron (single) purchased and moved into his principal residence on July 1, year 1. On June 1, year 2, Cameron lost his job. Because he couldn't afford the payments on his new home, he sold it on July 1, year 2 in order to move into some apartments across the street. On the sale of his principal residence, Cameron realized a $50,000 gain. How much of the gain is Cameron allowed to exclude from his year 3 gross income?

$0

Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year, if any?

$0 net income. $1,000 depreciation expense carried forward to next year.

In year 1, Jaspreet purchased a new home for $500,000 by making a down payment of $400,000 and financing the remaining $100,000 with a loan, secured by the residence, at 6 percent. In year 3, Jaspreet made interest only payments of $6,000 on the $100,000 loan. On January 1, year 3 when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home). The first (early in the day) was for $80,000 at an interest rate of 9 percent. The second home equity loan from a different bank (later in the day) was for $40,000 at an interest rate of 7 percent. In year 3, Jaspreet paid $7,200 of interest payments on the first home equity loan and $2,800 interest expense on the second. Jaspreet used the proceeds from the both home-equity loans for purposes unrelated to the home. What is the maximum amount of interest expense Jaspreet can deduct on these loans as home related interest expense?

$14,600.

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?

$150.

Ethan (single) purchased his home on July 1, 2007. On July 1, 2014 he moved out of the home. He rented the home until July 1, 2016 when he moved back into the home. On July 1, 2017 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2017 gross income?

$168,000

Dawn (single) purchased her home on July 1, 2007. On July 1, 2015 Dawn moved out of the home. She rented out the home until July 1, 2016 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2016 gross income?

$230,000.

Harvey rents his second home. During the year, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income for the year?

$25,000.

In year 1, Gabby purchased a new home for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. In year 3, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, year 3, Gabby executed two home equity loans (both secured by the home). The first was for $80,000 at an interest rate of 7 percent. The second home equity loan from a different bank (later in the day) was for $40,000 at an interest rate of 9 percent. In year 3, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home. What is the maximum amount of interest expense Gabby can deduct on these loans as home related interest expense?

$25,905

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?

$250,000.

Michael (single) purchased his home on July 1, 2006. On July 1, 2014 he moved out of the home. He rented out the home until July 1, 2015 when he moved back into the home. On July 1, 2016 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2016 gross income?

$250,000.

Kimberly purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2 Kimberly made interest-only payments on this loan in the amount of $18,000 each year. On July 1, year 1, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During year 1, she made interest-only payments on this loan in the amount of $5,000 and, during year 2, she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense ($18,000 + $10,000) that Kimberly paid during year 2 may she deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

$26,353.

Jessica purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2, Jessica made interest-only payments on this loan of $18,000 (each year). On July 1, year 1, when her home was worth $500,000 Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During year 1, she made interest-only payments on the second loan in the amount of $5,000. During year 2, she made interest only on the second loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during year 2 may she deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard?

$28,000.

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?

$31,250.

Patrick purchased a home on January 1, year 1 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 year 1, Patrick made interest-only payments on the loan of $30,000. On July 1, year 1, 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 year 1, 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 year 1 may he deduct as an itemized deduction?

$33,000.

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?

$4,500.

Ilene rents her second home. During the year, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in the year?

$5,000.

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?

$500,000

What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?

$500,000.

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?

$6,000.

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?

$6,000.

Patricia purchased a home on January 1, year 1 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 1, Patricia made interest-only payments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during year 1 may she deduct as an itemized deduction?

$66,000.

In year 1, Kris 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 his home was worth $300,000, Kris refinanced the home by taking out a $150,000 mortgage at 5 percent. With the loan proceeds, he paid off the $40,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During year 4, he made interest only payments on the new loan of $7,500. What amount of the $7,500 interest expense on the new loan can Kris deduct in year 4 on the new mortgage as home related interest expense?

$7,000.

Amanda purchased a home for $1,000,000 in year 1. She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in year 10 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 qualifying home-related debt for tax purposes?

$700,000.

Which of the following statements regarding personal and/or rental use of a home is false?

A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day.

Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct?

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

Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

All else equal, the break-even point for a taxpayer paying points on an original mortgage is longer when the taxpayer's marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed.

Which of the following statements regarding deductions for real property taxes is incorrect?

An individual deducts real property taxes on her principal residence as a for AGI deduction.

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

Deductible home office expenses are for AGI deductions limited to (gross income from the business minus non home office related expenses).

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

Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

Braxton owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?

Depreciation expense, other expenses, property taxes and interest expense. Other expenses, depreciation expense, property taxes and interest expense. Property taxes and interest expense, depreciation expense, other expenses. Other expenses, property taxes and interest expense, depreciation expense. None of the choices are correct.

Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?

Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.

Which of the following statements regarding home-related transactions is correct?

If a taxpayer uses a residence as a rental property (and deducts depreciation expense against the basis of the property) and as a personal residence the taxpayer will not be allowed to exclude the entire amount of gain even if the taxpayer otherwise meets the ownership and use tests and the amount of the gain is less than the limit on excludable gain.

When a taxpayer experiences a net loss from a nonresidence (rental property):

If the taxpayer is not allowed to deduct the loss due to the passive activity loss limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

On February 1, 2016 Stephen (who is single) sold his principal residence (home 1) at a $100,000 gain. He was able to exclude the entire gain on his 2016 tax return. Stephen purchased and moved into home 2 on the same day. Assuming Stephen lives in home 2 as his principal residence until he sells it, which of the following statements is true?

In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2016.

Katy owns a second home. During the year, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home?

Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI. Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home. Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy's deductible expenses for the year may not exceed the amount of her rental receipts (she may not report a loss from the rental property). All of the choices are correct.

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in direct expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?

Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.

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?

LTCG

Lauren purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence. During year 1, Lauren made interest-only payments on the loan. On July 1, year 1, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During year 1, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies)?

Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan unless she uses the loan proceeds to substantially improve the home in which case she would be able to deduct all of the interest.

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?

None of the choices are true.

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)?

Ownership and use test

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:

Personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home

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

Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.

Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct (Jamison does not use the simplified method for determining the home office expense deduction)?

Property taxes and interest expense, other expenses, depreciation expense.

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

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.

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property.

Which of the following statements regarding interest expense on home-related debt is correct?

Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited amount of home equity indebtedness.

Which of the following statements regarding the IRS and/or Tax Court approaches to allocating home-related expenses between rental use and personal use is correct?

The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use.

Which of the following statements regarding the home office expense deduction is correct?

The amount of home office expense allowed under the simplified method of computing home office expenses is limited to a fixed amount no matter how much the income from the business and no matter how big the home office. Taxpayers may choose to use the actual expense method for determining home office expenses in one year and choose the simplified method in a different year. Under the simplified method of computing home office expenses, a taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense. All of the choices are correct.

Which of the following statements regarding qualified home equity indebtedness is correct?

The limit on qualified home equity indebtedness depends on filing status

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?

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

A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.

false

A personal residence is not a capital asset.

false

A taxpayer who is financing his personal residence and who pays points on the loan in the form of prepaid interest generally must deduct the points over the life of the loan no matter whether the loan is an original loan or a refinance of an existing loan.

false

A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.

false

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

false

Depending on AGI, taxpayers may be able to deduct mortgage insurance premiums as a for AGI deduction.

false

For tax purposes a dwelling unit is a residence if the taxpayer's number of personal use days of the unit is more than ten days.

false

In terms of allocating expenses between rental use and personal use, the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

false

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

false

Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.

false

Taxpayers with high AGI are not allowed to deduct any interest on qualifying home equity indebtedness.

false

The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for three or more years during the five year period ending on the date of sale

false

The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may deduct in a particular year.

false

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

false

When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

false

When determining the number of days a taxpayer has rented a home during the year, any day when the home is available for rent but not actually rented out counts as a day of personal use.

false

When determining the number of days a taxpayer has rented a home during the year, any day when the home is available for rent but not actually rented out counts as a day of rental use.

false

A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

true

A tax loss from a rental home is a passive activity loss.

true

A taxpayer can qualify for the home sale exclusion even if she has moved out of the home and is renting the home to another at the time of the sale.

true

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

true

A taxpayer who otherwise meets the ownership and use tests may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.

true

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home.

true

A taxpayer who sells a principal residence that has been used (or is being used) as a rental property since 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.

true

Expenses of a vacation home allocated to rental use are deductible for AGI.

true

For determining whether a taxpayer qualifies to exclude gain on the sale of a principal residence, the periods of ownership and use need not be continuous nor do they need to cover the same two-year period.

true

For regular tax purposes, a taxpayer may deduct interest expense on qualifying home equity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home.

true

In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

true

In certain circumstances, a taxpayer who does not meet the ownership and use tests may still be allowed to exclude the entire realized gain on the sale of a principal residence.

true

In general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence.

true

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).

true

Jacoby purchases a home for $1,500,000 by making a $150,000 down payment and by borrowing the remaining $1,350,000 with a loan secured by the home. Jacoby can deduct interest expense on $1,100,000 of the loan principal.

true

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

true

Renting a residence may have nontax advantages over owning a home.

true

Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence.

true

Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

true

Taxpayers using the simplified method for computing home office expenses do not deduct depreciation expense for the home office use.

true

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and to the rental use.

true

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.

true

The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

true

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is based on the number of rental days over rental days plus personal use days.

true