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Exam 14: Tax Consequences of Home Ownership

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Question 1

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On April 1, year 1, Mary borrowed $210,000 to refinance the original mortgage on her principal residence. Mary paid 3 points to reduce her interest rate from 7 percent to 6 percent. The loan is for a 30-year period. How much can Mary deduct in year 1 for her points paid?

A) $157.5.
B) $210.5.
C) $4,725.
D) $6,300.

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

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Question 2

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Tyson owns a condominium near Laguna Beach, California. In 2020, he incurs the following expenses in connection with his condo: (Round your intermediate and final answer to whole number.) During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assume Tyson uses the Tax Court method of allocating expenses to rental use of the property. Tyson itemizes deductions, and the sum of his itemized deduction for non-home business taxes and the real property taxes allocated to rental use of the home is less than $10,000. What is Tyson's net rental income for the year (assume this is not a leap year)?

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$16,326
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Question 3

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Patricia purchased a home on January 1, 2017, for $1,200,000 by making a down payment of $100,000 and financing the remaining $1,100,000 with a loan, secured by the residence, at 6 percent. From 2017 through 2020, Patricia made interest-only payments on the loaneach year in the amount of $66,000. What amount of the $66,000 interest expensethat Patricia paid during 2020 may she deduct as an itemized deduction? (Assume not married filing separately.)

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 $16,900 of gross income from his business activities, and he reports $12,675 of business expenses unrelated to his home office. For his entire home, he reported $14,800 of mortgage interest, $3,600 of property taxes, $3,300 of home operating expenses, and $4,400 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 $16,900. 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.

In terms of allocating expenses between rental use and personal use, the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

A taxpayer may be required to include in gross incomethe gain the taxpayer realizes when she sells her principal residence.

Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo: During the year, Ashton rented the condo for 120 days and he received $24,000 of rental receipts. He did not use the condo at all for personal purposes during the year. Ashton is considered to be an active participant in the property. Ashton's AGI from all sources other than the rental property is $120,000. Ashton does not have passive income from any other sources. What is Ashton's AGI?

For determining whether a taxpayer qualifies to exclude gain on the sale of a principal residence, the periods of ownership and use need not be continuous nor do they need to cover the same two-year period.

Harvey rents his second home. During the year, Harvey reported a net loss of $53,000 from the rental. If Harvey is an active participant in the rental and his AGI is $93,600, how much of the loss can he deduct against ordinary income for the year?

Brady 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. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year, if any?

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.

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 and expenses from the home?

In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

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?

Taxpayers with high AGI are not allowed to deduct home mortgage interest expense.

Jacoby purchased a homein 2017 for $1,500,000 by making a $150,000 down payment and by borrowing the remaining $1,350,000 with a loan secured by the home. He made interest-only payments for 2017, 2018, 2019 and 2020. In 2020, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

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. Assume that Braxton itemizes deductions and nonrental taxes do not exceed $10,000 by more than the real property taxes allocated to business use of the home. 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 $330,000 to buy her principal residence. Mary paid 3 points to reduce her interest rate from 5 percent to 4 percent. The loan is for a 30-year period. What is Mary's year 1 deduction for her points paid?

On July 1 of year 1, Elaine purchased a new home for $510,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $10,200 ($510,000 × 2%) . On the settlement statement, Elaine was charged $5,100 for the year in property taxes and the seller was charged $5,100. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $11,200. Elaine wrote a $11,200 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? (Assume not married filing separately.)

Darren (single)purchased a home on January 1, 2016, for $400,000. Darren lived in the home as his primary residence until January 1, 2018, when he began using the home as a vacation home. He used the home as a vacation home until January 1, 2019. (He used a different home as his primary residence from January 1, 2018, to January 1, 2019.)On January 1, 2019, Darren moved back into the home and used it as his primary residence until January 1, 2020, when he sold the home for $500,000. What amount of the $100,000 gain Darren realized on the sale must he recognize for tax purposes in 2020?