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Exam 14: Tax Consequences of Home Ownership

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Question 21

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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?

A) $0 net income. $1,000 depreciation expense carried forward to next year.
B) ($1,000) net loss. $0 expenses carried over to next year.
C) $0 net income. $1,000 of other expense carried over to next year.
D) $0 net income. $1,000 of interest expense and property taxes carried over to next year.

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

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Question 22

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Leticia purchased a home on July 1,year 1 for $200,000.She paid $180,000 down and financed the remaining $20,000.On January 1,year 3 when the outstanding balance of her mortgage was $15,000 and her home was valued at $300,000,Leticia refinanced her home for $200,000.With the $200,000 loan,she paid off the remaining $15,000 balance of her original mortgage,she used $35,000 to substantially improve her home and she used the remaining $150,000 for purposes unrelated to her home.During year 5,Leticia made interest-only payments of $15,000 on the loan.What amount of the $15,000 interest expense is Leticia allowed to deduct in year 5?

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$11,250
$15,000 × [(100,000 + 50,000)/20...

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Question 23

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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?

Taxpayers with high AGI are not allowed to deduct any interest on qualifying home equity indebtedness.

Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?

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

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.How much of the gain may Shantel and Daron exclude?

A taxpayer who sells a principal residence that has been used (or is being used)as a rental property since 2005 will not be allowed to exclude the portion of the gain attributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.

When determining the number of days a taxpayer has rented out a home during the year,any day when the home is available for rent but not actually rented out counts as a day of personal use.

Which of the following statements regarding home-related transactions is correct?

When a taxpayer finances her personal residence,in general,she may not deduct points paid for loan origination fees,but she may deduct points paid as prepaid interest.

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.

The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home,the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

Jacoby purchases a home 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.Jacoby can deduct interest expense on $1,100,000 of the loan principal.

In year 1,Abby 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 her home was worth $300,000,Abby refinanced the home by taking out a $120,000 mortgage at 5 percent.With the loan proceeds,she paid off the $40,000 balance of the existing mortgage and used the remaining $80,000 for purposes unrelated to the home.During year 4,she made interest-only payments on the new loan of $6,000.What amount of the $6,000 interest expense on the new loan can Abby deduct in year 4 on the new mortgage as home related interest expense?

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

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

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.

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