Chapter 14

What is the formula used by the IRS when allocating mortgage interest and property taxes for residences with significant rental activities? Multiple choice question. - Expense x (365 ÷ total rental days) - Expense x (total rental days ÷ 365) - Expense x (total days used ÷ total rental days) - Expense × (total rental days ÷ total days used)

- Expense × (total rental days ÷ total days used)

Which of the following days are counted as rental days for a dwelling unit?

- The home is being repaired for rental use. - Someone is staying in the home and paying fair market value.

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

150,000

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 2022, 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

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.

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

buying, refinancing

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

Which of the following statements is correct regarding real property taxes? (Check all that apply.) Multiple select question. 1. Real property taxes are deductible as an itemized deduction to the extent they exceed 7.5% of AGI. 2. Real property taxes are deductible either for or from AGI depending on the use of the real property. 3. Real property taxes are only deductible if the real property is used in a trade or business or is rental property. 4. Real property taxes are deductible for a taxpayer's primary residence and one additional residence regardless of the number of residences owned. 5. The maximum real property tax amount that may be taken as an itemized deduction is $10,000 for a married couple that files jointly.

-Real property taxes are deductible either for or from AGI depending on the use of the real property. -The maximum real property tax amount that may be taken as an itemized deduction is $10,000 for a married couple that files jointly.

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

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? Multiple choice question. 1. Change in marital status 2. Significant health issues 3. Change in employment 4. Unforeseen financial difficulties

1.

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? 1. Fred - because he moved into the home after a period of nonqualified use. 2. Both Ed and Fred - During the 5 year period preceding the sale, both brothers had principal residences other than the homes they sold. 3. 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. 4. Ed - because he moved out of his house and had a new principal residence for the last two years.

1. Fred - because he moved into the home after a period of nonqualified use.

Which of the following statements are correct regarding acquisition indebtedness? (Check all that apply.) Multiple select question. 1. Principal payments on the loan reduce acquisition indebtedness. 2. Acquisition indebtedness can be increased by additional debt used to substantially improve the residence. 3.Deductible interest can NOT exceed interest on $1,000,000 in acquisition indebtedness for debt incurred after December 15, 2017. 4. Deductible interest can NOT exceed interest on $750,000 in acquisition indebtedness for debt incurred before December 16, 2017.

1. Principal payments on the loan reduce acquisition indebtedness. 2. Acquisition indebtedness can be increased by additional debt used to substantially improve the 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? Multiple choice question. 1. The exclusion of the gain on the sale of a personal residence can only be used once every five years. 2. 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. 3. 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. 4. 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.

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

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 _____% of the days rented during the year.

14; 10

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

Which of the following rules for determining the basis of a personal residence is measured INCORRECTLY? Multiple choice question. 1. Converted property (from rental home to residence) - the taxpayer's basis in the home at the time of conversion 2. Inheritance - the basis carries over from the deceased owner 3. Gift - the donor's basis 4. Purchase - the cost of the home to the taxpayer

2

Which of the following days are counted as personal use days for a dwelling unit? (Check all that apply.) 1. A friend of the taxpayer stays in the home and pays a fair market rental rate. 2. A relative of an owner stays in the home and pays a fair market rental rate. 3. The taxpayer or other owner resides in the unit. 4. A relative of an owner stays in the home for free. 5. A friend of the taxpayer stays in the home and pays a below market rental rate. 6. The home is available for rent, but is NOT actually rented out.

2, 3, 4, 5

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

What type of nonbusiness interest is deductible? Multiple choice question. 1. Interest on credit card debt 2. Interest on unsecured line of credit 3. Interest on automobile loans 4. Interest on acquisition indebtedness

4

Although losses from rental property are classified as passive losses, there is an exception that allows a taxpayer who is a(n) ___________ participant in a rental activity to deduct up to __________ of the rental loss against nonpassive income.

ACTIVE; 25000

Tier 2 Rental Expenses

All other expenses allocated to the rental activity except depreciation expense, including payments for utilities, maintenance, and other expenses.

Tier 3 Rental Expense

Depreciation Expense

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.

Direct expenses: 500 Indirect Expenses: 810

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

Direct rental expenses are allocated between personal and rental use.

What is the formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities?

Expense × (total rental days ÷ 365)

Tier 1 Rental Expense

Expenses for obtaining tenants (such as advertising and commissions for real estate agents) and rental mortgage interest expense and real property taxes the taxpayer would be able to deduct as itemized deductions if the taxpayer did not rent the property at all.

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

False

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

In each of the following scenarios, assume that the five-year period prior to the sale begins on January 1, 2017 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 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. -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. -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. -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.

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. (Because she lived in the home first.)

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?

Principle residence

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.

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

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.

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? Multiple choice question. -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. -The taxpayer who has owned the property for the largest portion of the year is allowed to deduct the property tax. -The taxpayer who owned the property at the beginning of the year (the assessment date). -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.

Any debt secured by a qualified residence that is incurred in purchasing, constructing, or substantially improving the residence is called _______________ ___________.

acquisition indebtedness

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 Blank______. Multiple choice question. -reports the rental income but is not allowed to deduct the rental expenses -reports the rental income and expenses up to a maximum net loss of $25,000 -reports the rental income and deducts the rental expenses, but only to the extent of the rental income -does NOT report any rental income and is not allowed to deduct any rental expenses

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

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

dwelling unit

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. (Enter only one word per blank.)

nonresidence, deductible

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 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. (Enter only one word per blank.)

regularly , exclusively

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