Chapter 14
Ethan (single) purchased his home on July 1, 2008. He lived in the home as his principal residence until July 1, 2015 when he moved out of the home and rented it out until July 1, 2017 when he moved back into the home. On July 1, 2018 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2018 gross income? $0. $168,000. $200,000. $210,000.
$168,000. Ethan's post 2008 nonqualified use is 2 years. He owned the property for 10 years so he is not allowed to exclude 20% of the gain ($210,000 × 20% = $42,000). He is allowed to exclude $168,000 ($210,000 minus $42,000).
Dawn (single) purchased her home on July 1, 2008. On July 1, 2017 Dawn moved out of the home. She rented out the home until July 1, 2018 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 2018 gross income? $0. $23,000. $207,000. $230,000.
$230,000. Dawn meets the ownership and use tests even though she did not live in the home at the time of the sale so she qualifies for the full exclusion. Further, the nonqualified use provision does not apply because she did not move back into the home before selling it.
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? $35,000. $25,000. $5,000. $0.
$25,000.
Aubrey bought her house for $150,000 and moved into it four years ago. Last November 1, she married Dave and he moved in with her. This November 1, they have decided to sell because prices in the neighborhood have skyrocketed. If they sell the house for $550,000, how much of the gain are they allowed to exclude? $0 $250,000 $300,000 $400,000
$250,000 Because there are no hardship circumstances and Dave does not meet the use test, they can use only Aubrey's exclusion of $250,000.
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? $0. $3,000. $30,000. $33,000.
$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? $0. $3,125. $31,250. $35,000.
$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.) $0. $4,000. $4,500. $5,000. $9,000.
$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.
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? $15,000. $10,000. $5,000. $0.
$5,000. $5,000 [($140,000 - 100,000) × 0.5] = $20,000 disallowed, $5,000 allowed.
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? $0. $250,000. $500,000. $700,000.
$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.
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? $50. $150. $4,500. $6,000.
$6,000. $200,000 × 3% = $6,000.
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.) $600,000. $750,000. $1,000,000. $1,100,000.
$600,000. $600,000 is the acquisition indebtedness. Refinancing the loan does not change the acquisition indebtedness.
The Johnsons have a second home that was available to rent for three full weeks (28 days) during the summer. Of the twenty eight days, the Johnsons rented it to unrelated tenants for 16 days at fair market value. In addition, the Johnsons rented the home to the Florians for four days. Because they are family friends, the Florians only paid half the market rate for the rent. The Johnsons also rented the home for five days to the Smiths. The Smiths paid full fair market value rent even though they are related to the Johnsons. How many days did the Johnsons use the home for rental purposes during the year? 16 20 21 25 28
16 Days when the home is available for rent, but not rented, count as neither personal nor rental days. Renting to relatives is deemed personal use regardless of rent paid. Renting at less than fair market value is deemed personal not rental use.
Which of the following statements regarding deductions for real property taxes is incorrect? A taxpayer is allowed to immediately deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company. Taxpayers are not allowed to deduct payments made for setting up water and sewer services. An individual deducts real property taxes on her principal residence as a from AGI deduction. Taxpayers are not allowed to deduct payments made for repairs to neighborhood sidewalks.
A taxpayer is allowed to immediately deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.
Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct? A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale. A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion. A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion. For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.
A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.
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 miscellaneous itemized deductions subject to the 2 percent of AGI floor. Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor. Deductible home office expenses are for AGI deductions limited to (gross income from the business minus non-home office related expenses). Deductible home office expenses are for AGI deductions and may be deducted without limitation.
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 not deductible. Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent floor. Deductible home office expenses of employees are for AGI deductions limited to gross income from the business. Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business.
Deductible home office expenses of employees are not deductible.
How is depreciation expense on a residence with significant rental use (vacation home) allocated to rental use? Depreciation expense × (number of rental days/365). Depreciation expense × [number of rental days/(number of rental days + number of personal use days)]. Depreciation expense × (number of rental days/number of personal days). None of the choices are correct.
Depreciation expense × [number of rental days/(number of rental days + number of personal use days)].
Which of the following statements regarding the home mortgage interest expense deduction is false for a single taxpayer? 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. Taxpayers may deduct all of the interest paid on up to $750,000 of acquisition debt if the debt occurred in January of 2018. 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. None of the choices is false.
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.
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 include the rental receipts in gross income and deduct the rental expenses for AGI. Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI. Kenneth would include the rental receipts in gross income and would not deduct the rental expenses because he used the residence for personal purposes for most of the year. Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.
Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.
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 approach allocates more property tax and interest expense to rental use than does the IRS approach. The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use. Correct The IRS approach allocates interest expense and property taxes to rental use based on the ratio of the number of days of rental use to the total days of the year. None of these statements are correct.
The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use. Correct
Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense? Only the taxpayer's principal residence. The taxpayer's principal residence and two other residences (chosen by the taxpayer). The taxpayer's principal residence and one other residence (chosen by the taxpayer). Any two residences chosen by the taxpayer.
The taxpayer's principal residence and one other residence (chosen by the taxpayer).
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 taxpayer's rental use of the home. personal use of the home exceeds half of the taxpayer's rental use of the home. personal use of the home exceeds the lesser of 14 days or 10 percent of the taxpayer's rental use of the home. personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.
personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.
For a home to be considered a rental (nonresidence) property, a taxpayer must: rent the property for 15 days or more during the year. 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. use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented. 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. rent the property for 15 days or more during the year and use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.
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.
