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Exam 14: Tax Consequences of Home Ownership

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Question 21

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Ethan (single) purchased his home on July 1, 2010. He lived in the home as his principal residence until July 1, 2017, when he moved out of the home, and rented it out until July 1, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $223,000 gain. What amount of the gain is Ethan allowed to exclude from his gross income?

A) $0.
B) $178,400.
C) $213,000.
D) $223,000.

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

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Question 22

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Ilene rents a property for the entire year. During the year, Ilene reported a net loss of $10,400 from the rental. If Ilene is an active participant in the rental and her AGI is $130,000, how much of the loss can she deduct against ordinary income in the year?

A) $10,400.
B) $400.
C) $10,000.
D) $0.

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

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Question 23

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Jessica purchased a home on January 1, 2020, for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. During 2020 and 2021, Jessica made interest-only payments on this loan of $18,000 (each year) . On July 1, 2020, when her home was worth $500,000, Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2020, she made interest-only payments on the second loan in the amount of $5,000. During 2021, she made interest-only payments on the second loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2021 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

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?

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?

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 $57,500 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?

Leticia purchased a home on July 1, 2018, for $340,000. She paid $306,000 down and financed the remaining $34,000. On January 1, 2020, when the outstanding balance of her mortgage was $25,500 and her home was valued at $510,000, Leticia refinanced her home for $340,000. With the $340,000 loan, she paid off the remaining $25,500 balance of her original mortgage, she used $49,000 to substantially improve her home, and she used the remaining $265,500 for purposes unrelated to her home. During 2022, Leticia made interest-only payments of $25,500 on the loan. What amount of the $25,500 interest expense is Leticia allowed to deduct in year 2022?

Alison Jacobs (single)purchased a home in Las Vegas, Nevada, for $522,000. She moved into the home on September 1, year 0. She lived in the home as her primary residence until July 1 of year 4, when she sold the home for $809,100. If Alison's tax rate on long-term capital gains is 15percent, what amount of tax will Alison pay on the $287,100 gain?

Alfredo is self-employed and he uses a room in his home as his principal place of business. He meets clients there and doesn't use the room for any other purpose. The size of his home office is 600 square feet. The size of his entire home is 3,000 square feet. During the current year, Alfredo received $10,000 of gross income from his business activities, and he reports $7,500 of business expenses unrelated to his home office. For his entire home, he reported $10,000 of mortgage interest, $2,000 of property taxes, $2,500 of home operating expenses, and $4,500 of depreciation expense.Alfredo itemizes deductions, and the sum of his itemized deduction for non-home business taxes and the real property taxes allocated to business use of the home is less than $10,000. What amount of home office expenses is Alfredo allowed to deduct in the current year? (Assume he uses the actual expense method of computing home office expenses.)Indicate the amount and type of expenses he must carry over to next year, if any.

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

A taxpayer who otherwise meets the ownership and use testson the sale of her principal residence 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 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.

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

Renting a residence may have nontax advantages over owning a home.

Which of the following statements regarding deductions for real property taxes is incorrect?

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 32 percent. What is Jasper's break-even point in years? (For simplicity, ignore time value of money concerns.)

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

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. What is the maximum amount of gain that Shantel and Daron may exclude?

Jamison is self-employed and he works out of an office in his home. Jamison itemizes his deductions, and the sum of his itemized deduction for non-home business taxes and the real property taxes allocated to business use of the home is less than $10,000. 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 expenses allocated to the home office business use is correct? (Jamison does not use the simplified method for determining the home office expense deduction.)

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