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Exam 14: Tax Consequences of Home Ownership

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Question 41

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Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct?

A) A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale.
B) A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.
C) A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion.
D) For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.

E) C) and D)
F) All of the above

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Question 42

Multiple Choice

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

A) The amount of home office expense allowed under the simplified method of computing home office expenses is limited to a fixed amount no matter how much the income from the business and no matter how big the home office.
B) Taxpayers may choose to use the actual expense method for determining home office expenses in one year and choose the simplified method in a different year.
C) Under the simplified method of computing home office expenses, a taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense.
D) All of these are correct.

E) All of the above
F) A) and B)

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Question 43

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Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?

Patrick purchased a home on January 1, 2014 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 2014 Patrick made interest-only payments on the loan of $30,000. On July 1, 2014, 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 2014, 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 2014 may he deduct as an itemized deduction?

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?

A taxpayer who sells a principal residence that has been used (or is being used) as a rental property will not be allowed to exclude the portion of the gain attributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and to the rental use.

Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence.

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?

Expenses of a vacation home allocated to rental use are deductible for AGI.

Taxpayers with high AGI are not allowed to deduct interest on qualifying home equity indebtedness.

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?

Which of the following statements regarding interest expense on home-related debt is correct?

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

In 2011, Kris purchased a new home for $200,000 by making a down payment of $150,000 and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, 2014, the outstanding balance on the loan was $40,000. On January 1, 2014, when his home was worth $300,000, Kris refinanced the home by taking out a $150,000 mortgage at 5 percent. With the loan proceeds, he paid off the $40,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During 2014, he made interest only payments on the new loan of $7,500. What amount of the $7,500 interest expense on the new loan can Kris deduct in 2014 on the new mortgage as home related interest expense?

Several years ago, Chara acquired a home that she vacationed in part of the time and she rented part of the time. During the current year Chara: • Personally stayed in the home for 14 days, • Rented it at full fair market value to her parents for eight days, • Rented it to her sister for five days at half price, • Rented it to her friend at a discounted rate for three days, • Rented it to another friend at fair market value for six days, • Rented the home to third parties for 42 days at the market rate, • Did repair and maintenance work for three days to keep the home ready for renters, and • Marketed the property and made it available for rent for 120 days during the year even though it was not rented during this time. How many days of personal use and how many days of rental use did Chara experience on the property during the year?

Leticia purchased a home on July 1, 2010 for $200,000. She paid $180,000 down and financed the remaining $20,000. On January 1, 2012 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 2014, 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 general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence.

In order to be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet which of the following tests?