Chapter 14 SmartBook

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

$0 Since the home is NOT rented for 14 days or more, the rental revenue and expenses are not reported.

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

$1,600

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

1,000,000

A dwelling 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.

14 15

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.

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 ____ 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 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? a. 1 b. 2 c. 0 d. 3

3

Which of the following statements is INCORRECT regarding points charged on a home loan? a. Points paid to refinance the home are amortized and deducted over the life of the loan. b. Points paid in connection with the acquisition of the taxpayer's principal residence are deductible immediately. c. Points are deductible when paid to the lender in exchange for a reduced interest rate on the loan. d. A point is 10 percent of the principal amount of the 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. Home-equity interest is deductible if the proceeds are used to substantially improve the home. b. The loan must be secured by the residence. c. A qualified residence must be the taxpayer's primary residence. d. For mortgage debt incurred after December 15, 2017, taxpayers are limited to $750,000 (married filing jointly) for acquisition indebtedness.

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

Which of the following days are counted as personal use days for a dwelling unit? (Check all that apply.) a. A relative of an owner stays in the home for free. b. The home is available for rent, but is NOT actually rented out. c. The taxpayer or other owner resides in the unit. d. A friend of the taxpayer stays in the home and pays a fair market rental rate. e. A friend of the taxpayer stays in the home and pays a below market rental rate. f. 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. The taxpayer or other owner resides in the unit. 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 are correct regarding the deductibility of home mortgage interest? (Check all that apply.) a. A taxpayer can deduct interest on up to two qualified residences. b. The loan must be secured by the residence. c. Interest on home-equity indebtedness is only deductible if it is used for home improvements. d. Acquisition indebtedness can NOT increase, but only decrease throughout the term of the loan.

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

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

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

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? a. Change in employment b. Significant health issues c. Unforeseen financial difficulties d. Change in marital status

Change in marital status

What is the formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities? a. Expense × (365 ÷ total rental days) b. Expense × (total rental days ÷ 365) c. Expense × (total days used ÷ total rental days) d. Expense × (total rental days ÷ total days used)

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? a. Expense x (total rental days ÷ 365) b. Expense x (total days used ÷ total rental days) c. Expense × (total rental days ÷ total days used) d. Expense x (365 ÷ total rental days)

Expense × (total rental days ÷ total days used)

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

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. a. True b. False

False The real property tax is allocated between the buyer and the seller based on the time each party owns the property.

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

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? a. 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. b. Both Ed and Fred - During the 5 year period preceding the sale, both brothers had principal residences other than the homes they sold. c. Ed - because he moved out of his house and had a new principal residence for the last two years. d. Fred - because he moved into the home after a period of nonqualified use.

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

Gift - the donor's basis

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

Inheritance - the basis carries over from the deceased owner

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

Interest on acquisition indebtedness

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? a. 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. b. 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. c. 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. d. 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.

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.

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

Mobile home Condominium Houseboat Recreational vehicle (camper)

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

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

Principal residence

Which of the following statements is correct regarding real property taxes? (Check all that apply.) a. Real property taxes are deductible either for or from AGI depending on the use of the real property. b. 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. c. Real property taxes are deductible for a taxpayer's primary residence and one additional residence regardless of the number of residences owned. d. Real property taxes are only deductible if the real property is used in a trade or business or is rental property. e. Real property taxes are deductible as an itemized deduction to the extent they exceed 7.5% of AGI.

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.

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

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.) a. Sandy uses her basement as a photo developing lab and framing area for her photography business. b. Sandy uses the kitchen to prepare coffee, tea and pastries or cookies for her client meetings. c. 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. d. Sandy uses her living room to meet with clients during the day. At night she uses it to read and watch TV.

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? a. The $40,000 gain is excluded from taxation because it results from the sale of a principal residence. b. The $40,000 gain is a capital gain that is taxed at preferential rates equal to or lower than the taxpayer's marginal rate. c. The $40,000 gain is an ordinary gain and is taxed at marginal rates. d. The $40,000 gain is deferred if the taxpayer will purchase another home as replacement property.

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? a. 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. b. The time of ownership and use must be a continuous two-year period. c. The exclusion of the gain on the sale of a personal residence can only be used once every two years. d. The taxpayer must have owned the property for at least two years during the five-year period ending on the date of the sale.

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

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? a. The home is a residence because Drake lived in the house for more than 10% of rental days. b. 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. c. The home is a residence. Drake used the home for the lesser of 14 days or 10% of the rental days.

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.) a. The home is being repaired for rental use. b. A friend of the taxpayer stays in the home and pays a fair market rental rate. c. A nonowner stays in the unit as the result of a vacation-swap arrangement. 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. A relative of an owner stays in the home and pays a fair market rental rate.

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

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? a. 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. 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 taxpayer who actually pays the real property tax or has it paid from his escrow account.

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

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? a. The taxpayer can claim a home office deduction regardless of whether she owns her home or rents her home. 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.

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.

Tier 1 <<<--->>> Expenses to obtain tenants

Tier 2 <<<--->>> Operating expenses for the rental property

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. a. True b. False

True

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

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

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

dwelling unit

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 place to meet with clients in the normal course of business.

exclusively regularly

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

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

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.

rental deductible

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.

unforeseen