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Exam 14: Tax Consequences of Home Ownership

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Question 21

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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.

A) True
B) False

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Question 22

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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?

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$300,000
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Question 23

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Darren (single) purchased a home on January 1, 2012 for $400,000. Darren lived in the home as his primary residence until January 1, 2014 when he began using the home as a vacation home. He used the home as a vacation home until January 1 2015 (he used a different home as his primary residence from January 1, 2014 to January 1, 2015). On January 1, 2015, Darren moved back into the home and used it as his primary residence until January 1, 2016 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 2016?

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

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?

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 general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence.

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?

Expenses of a vacation home allocated to rental use are deductible for AGI.

For tax purposes a dwelling unit is a residence if the taxpayer's number of personal use days of the unit is more than ten days.

Heidi (single) purchased a home on January 1, 2006 for $400,000. She lived in the home as her primary residence until January 1, 2014 when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2015 (she used a different home as her primary residence from January 1, 2014 to January 1, 2015). On January 1, 2015, Heidi moved back into the home and used it as her primary residence until January 1, 2016 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 2016?

Kristen rented out her home for 10 days during the year for $5,000. She used the home for personal purposes for the other 355 days. She allocated the following home expenses to the rental use of the home: Kristen's AGI is $120,000 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?

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 needed to move because he was changing jobs and his new job was located several hundred miles away. What amount of gain must Nelson recognize on the home sale in year 2?

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?

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

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

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

Which of the following statements regarding a taxpayer's principal residence is true for purposes of determining whether the taxpayer is eligible to exclude gain realized on the sale of the residence?

Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo: During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assuming Tyson uses the Tax Court method of allocating expenses to rental use of the property. What is Tyson's net rental income for the year?

In certain circumstances, a taxpayer who does not meet the ownership and use tests may still be allowed to exclude the entire realized gain on the sale of a principal residence.