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Exam 14: Tax Consequences of Home Ownership

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Question 1

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Which of the following statements regarding the home mortgage interest expense deduction is false for a single taxpayer?

A) Taxpayers may deduct all of the interest paid on up to $1,000,000 of acquisition debt if the debt occurred in January of 2017.
B) Taxpayers may deduct all of the interest paid on up to $750,000 of acquisition debt if the debt occurred in January of 2018.
C) If, in 2019, 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.
D) None of the choices is false.

E) A) and C)
F) C) and D)

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Question 2

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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.

A) True
B) False

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Question 3

Multiple Choice

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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?

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?

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?

Jason and Alicia Johnston purchased a home in Austin, Texas, for $500,000. They moved into the home on September 1, year 0. They lived in the home as their primary residence until July 1 of year 5, when they sold the home for $800,000. What amount of the $300,000 gain are they allowed to exclude? (Assume married filing jointly.)

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.

Leticia purchased a home on July 1, 2017, for $200,000. She paid $180,000 down and financed the remaining $20,000. On January 1, 2019, when the outstanding balance of her mortgage was $15,000 and her home was valued at $300,000, Leticia refinanced her home for $200,000. With the $200,000 loan, she paid off the remaining $15,000 balance of her original mortgage, she used $35,000 to substantially improve her home, and she used the remaining $150,000 for purposes unrelated to her home. During 2021, Leticia made interest-only payments of $15,000 on the loan. What amount of the $15,000 interest expense is Leticia allowed to deduct in year 2021?

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.

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

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

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

Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 400 square feet. The size of her entire home is 2,400 square feet. During the year, Mercury received $6,300 of gross income from her business activities and she reported $2,500 of business expenses unrelated to her home office. For her entire home in the current year, she reported $3,500 of mortgage interest, $1,000 of property taxes, $600 of insurance, $500 of utilities and other operating expenses, and $3,200 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in the current year using the actual expense method? Indicate the amount and type of expenses she must carry over to the next year, if any. What amount of home office expenses is Mercury allowed to deduct in the current year using the simplified method?

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) ?

Kristen rented out her home for 10 days during the year for $5,000. She used the home for personal purposes for the other 355 days. She allocated the following home expenses to the rental use of the home: Kristen's AGI is $120,000 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?

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.

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

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?

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.

Amelia is looking to refinance her home loan of $200,000. She has the option of (1)paying no discount points on the loan and paying interest at 7 percent or (2)paying 2 discount points on the loan and paying interest of 6 percent on the loan. Both options require Amelia to make interest-only payments for the first five years of the loan and pay back the loan over the 25 years after that (it is a 30-year loan). Amelia itemizes deductions irrespective of any interest expense she may pay. Amelia's marginal ordinary income tax rate is 32 percent. What is Amelia's break-even point in years? (For simplicity, ignore time value of money concerns.)