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Exam 14: Tax Consequences of Home Ownership

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Question 51

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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.

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Question 52

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On February 1,2017 Stephen (who is single) sold his principal residence (home 1) at a $100,000 gain.He was able to exclude the entire gain on his 2017 tax return.Stephen purchased and moved into home 2 on the same day.Assuming Stephen lives in home 2 as his principal residence until he sells it,which of the following statements is true?

A) Under no circumstance will Stephen be allowed to exclude gain on home 2 if he sells home 2 in 2018.
B) Stephen will be eligible to exclude gain on home 2 only if he waits until 2022 to sell it.
C) In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2017.
D) None of these is a true statement.

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Question 53

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Jasper is looking to purchase a new home for $250,000.He is paying $50,000 as a down payment on the home and financing the remaining $200,000 with a loan secured by the home.He has the option of (1)paying no discount points on the loan and paying interest at 6.5 percent or (2)paying one discount point on the loan and paying interest of 5.5 percent on the loan.Both options require Jasper to make interest-only payments for the first five years of the loan and to pay the loan principal over the 25 years after that (it is a 30-year loan).Jasper itemizes deductions irrespective of any interest expense he may pay.Jasper's marginal ordinary income tax rate is 28 percent.What is Jasper's break-even point in years (for simplicity,ignore time value of money concerns)?

Depending on AGI,taxpayers may be able to deduct mortgage insurance premiums as a for AGI deduction.

What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?

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?

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:

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

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-only payments 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 an itemized deduction,if she used the proceeds of the second loan to pay off student loans from law school?

Taxpayers with home offices who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use.Only expenses allocated to the home office use are deductible.

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?

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?

Ethan (single) purchased his home on July 1,2008.On July 1,2015 he moved out of the home.He rented the home 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?

Robin purchased a home on July 1,year 1 for $300,000.She paid $200,000 down and financed the remaining $100,000.On January 1,year 6 when the outstanding balance of her mortgage was $85,000 and her home was valued at $300,000,she refinanced her home for $250,000.With the $250,000 loan,she paid off the remaining $85,000 balance of her original mortgage,she used $70,000 to substantially improve her home and she used the remaining $95,000 for purposes unrelated to her home.During year 6,Robin made interest only payments of $12,500 on the loan.What amount of the $12,500 interest expense is Robin allowed to deduct in year 6?

Don owns a condominium near Orlando,California.This year,he incurs the following expenses in connection with his condo: 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?

Heidi (single)purchased a home on January 1,2007 for $400,000.She lived in the home as her primary residence until January 1,2015 when she began using the home as a vacation home.She used the home as a vacation home until January 1,2016 (she used a different home as her primary residence from January 1,2015 to January 1,2016).On January 1,2016,Heidi moved back into the home and used it as her primary residence until January 1,2017 when she sold the home for $700,000.What amount of the $300,000 gain Heidi realized on the sale must she recognize for tax purposes in 2017?

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?

Michael (single) purchased his home on July 1,2007.On July 1,2015 he moved out of the home.He rented out the home until July 1,2016 when he moved back into the home.On July 1,2017 he sold the home and realized a $300,000 gain.What amount of the gain is Michael allowed to exclude from his 2017 gross income? 

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?

In year 1,Jaspreet purchased a new home for $500,000 by making a down payment of $400,000 and financing the remaining $100,000 with a loan,secured by the residence,at 6 percent.In year 3,Jaspreet made interest only payments of $6,000 on the $100,000 loan.On January 1,year 3 when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home) .The first (early in the day) was for $80,000 at an interest rate of 9 percent.The second home equity loan from a different bank (later in the day) was for $40,000 at an interest rate of 7 percent.In year 3,Jaspreet paid $7,200 of interest payments on the first home equity loan and $2,800 interest expense on the second.Jaspreet used the proceeds from both home-equity loans for purposes unrelated to the home.What is the maximum amount of interest expense Jaspreet can deduct on these loans as home related interest expense?