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Exam 14: Tax Consequences of Home Ownership

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Question 41

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Taxpayers using the simplified method for computing home office expenses do not deduct depreciation expense for the home office use.

A) True
B) False

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Question 42

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

A) A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.
B) Taxpayers are not allowed to deduct payments made for setting up water and sewer services.
C) An individual deducts real property taxes on her principal residence as a for AGI deduction.
D) Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.

E) B) and D)
F) None of the above

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Question 43

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A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

Jessica 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,Jessica made interest-only payments on this loan of $18,000 (each year) .On July 1,year 1,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 year 1,she made interest-only payments on the second loan in the amount of $5,000.During year 2,she made interest only on the second loan in the amount of $10,000.What is the maximum amount of the $28,000 interest expense Jessica paid during year 2 may she 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?

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.

Jamison is self-employed and he works out of an office in his home.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) ?

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?

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?

A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

A taxpayer can qualify for the home sale exclusion even if she has moved out of the home and is renting the home to another at the time of the sale.

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.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) ?

Larry owned and lived in a home for five years before marrying Darlene.Larry and Darlene lived in the home for one year before selling it at a $600,000 gain.Larry was the sole owner of the residence until it was sold.How much of the gain may Larry and Darlene exclude?

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

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.

Harriet owns a second home that she rents to others.During the year,she used the second home for 10 personal days and for 200 rental days.Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is false?

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 year 1,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,year 4,the outstanding balance on the loan was $40,000.On January 1,year 4,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 year 4,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 year 4 on the new mortgage as home related interest expense?

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day.Jennifer is required to allocate expenses associated with the home between rental and personal use.

For a home to be considered a rental (nonresidence) property,a taxpayer must: