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Exam 14: Tax Consequences of Home Ownership

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Question 51

Multiple Choice

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

A) $0
B) $25,000
C) $250,000
D) $500,000

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

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Question 52

Multiple Choice

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Which of the following statements regarding the first time home buyer credit is correct?

A) Taxpayers who acquired a home in 2008 and claimed the credit is not required to pay the credit back.
B) Taxpayers who acquired a home in 2008 and claimed the credit are required to pay the credit back over a 15-year period.
C) Taxpayers who acquired a home in 2008 and claimed the credit are required to pay it back over a 15-year period.
D) None of these

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

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Question 53

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To be allowed to exclude gain on the sale of a principal residence, the taxpayer selling the home must be using the home as a principal residence at the time of the sale.

In 2012, 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 2014, Jaspreet made interest only payments of $6,000 on the $100,000 loan. On January 1, 2014, when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home) . The first was for $80,000 at an interest rate of 9 percent. The second home equity loan from a different bank was for $40,000 at an interest rate of 7 percent. In 2014, 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 the 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?

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. 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.

Amanda purchased a home for $1,000,000 in 2003 She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in 2014 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing. What is her total amount of qualifying home-related debt for tax purposes?

Nelson Whiting (single) purchased a home in Denver, Colorado for $300,000. He moved into the home on July 1 of year 1. He lived in the home as his primary residence until December 1, year 2 when he sold the home for $450,000. Nelson sold the home because he was changing jobs and his new job was in a different state. What amount of gain must Nelson recognize on the home sale in year 2?

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?

Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

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?

Jason and Alicia Johnston purchased a home in Austin, Texas for $500,000. They moved into the home on September 1, year 0. They lived in the home as their primary residence until July 1 of year 5 when they sold the home for $800,000. What amount of the $300,000 gain are they allowed to exclude?

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.

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

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?

On February 1, 2014 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 2014 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?

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)?

The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may deduct in a particular year.

Lebron Taylor purchased a home on July 1, 2013 for $500,000. Lebron paid for the entire purchase price with cash. In July of 2013, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During 2014, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2014?

Which of the following statements regarding qualified home equity indebtedness is correct?

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.