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Exam 14: Tax Consequences of Home Ownership

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Question 21

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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 andexpenses from the home?

A) Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.
B) 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) .
C) Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.
D) All of the above statements are correct.

E) A) and B)
F) None of the above

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Question 22

Multiple Choice

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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?

A) Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI.
B) 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.
C) Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.
D) Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI.

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

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Question 23

Multiple Choice

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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 expensesallocated to the home office business use is correct (Jamison does not use the simplified method for determining the home office expense deduction) ?

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

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

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?

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.

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.

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?

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 arelimited to net Schedule C income before home office expenses).

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

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?

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) ?

On March 31, year 1, Mary borrowed $200,000 to buy her principal residence. Mary paid3 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?

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 year5 when they sold the home for $800,000. What amount of the $300,000 gain are they allowed to exclude?

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-onlypayments 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?

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 AGIafter considering the tax effect of the rental use of her home?

Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in connection with her condo: During the year, Rayleen rented the condo for 130 days and she received $25,000 of rental receipts. She did not use the condo at all for personal purposes during the year. Rayleen is considered to be an active participant in the property. Rayleen's AGI from all sources other than the rental property is$130,000. Rayleen does not have passive income from any other sources. What is Rayleen's AGI?

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-onlypayments 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 anitemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

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