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Exam 14: Tax Consequences of Home Ownership

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Question 41

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Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in connection with her condo: $\begin{array} { l r } \text { Insurance } & \$ 1,250 \\\text { Mortgage interest } & 7,000 \\\text { Property taxes } & 2,100 \\\text { Repairs and maintenance } & 800 \\\text { Utilities } & 2,300 \\\text { Depreciation } & 9,000\end{array}$ 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?

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Question 42

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Dawn (single) purchased her home on July 1, 2005. On July 1, 2013 Dawn moved out of the home. She rented out the home until July 1, 2014 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 2014 gross income?

A) $0
B) $207,000
C) $225,000
D) $230,000

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

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Question 43

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Cameron (single) purchased and moved into his principal residence on July 1, 2014. On June 1, 2015, Cameron lost his job. Because he couldn't afford the payments on his new home, he sold it on July 1, 2015 in order to move into some apartments across the street. On the sale of his principal residence, Cameron realized a $50,000 gain. How much of the gain is Cameron allowed to exclude from his 2015 gross income?

At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.

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.

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home.

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.

A taxpayer may be required to pay tax on a gain the taxpayer realizes when she sells her principal residence.

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?

Don owns a condominium near Orlando, California. This year, he incurs the following expenses in connection with his condo: $\begin{array} { l r } \text { Insurance } & \$ 1,300 \\\text { Mortgage interest } & 10,000 \\\text { Property taxes } & 3,000 \\\text { Repairs and maintenance } & 900 \\\text { Utilities } & 2,200 \\\text { Depreciation } & 12,000\end{array}$ During the year, Don rented the condo for 70 days and he received $17,400 of rental receipts. He did not use the condo at all for personal purposes during the year. Don is considered to be an active participant in the property. Don's AGI from all sources other than the rental property is $140,000. Don does not have passive income from any other sources. What is Don's AGI?

When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

Kimberly purchased a home on January 1, 2013 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 2013 and 2014 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2013, 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 2013, she made interest-only payments on this loan in the amount of $5,000 and during 2014, 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 Kimberly paid during 2014 that she may deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

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?

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

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?

Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

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

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.

Lauren purchased a home on January 1, 2014 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. During 2014, Lauren made interest-only payments on the loan. On July 1, 2014, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2014, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies) ?

Patricia purchased a home on January 1, 2014 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 2014, Patricia made interest-only payments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during 2014 may she deduct as an itemized deduction?