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Exam 14: Tax Consequences of Home Ownership

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Question 31

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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) ?

A) Depreciation expense, other expenses, property taxes and interest expense
B) Other expenses, depreciation expense, property taxes and interest expense
C) Property taxes and interest expense, depreciation expense, other expenses
D) Other expenses, property taxes and interest expense, depreciation expense
E) None of these statements is correct.

F) D) and E)
G) A) and D)

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Question 32

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At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.

A) True
B) False

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Question 33

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Alison Jacobs (single) purchased a home in Las Vegas, Nevada for $400,000. She moved into the home on September 1, year 0. She lived in the home as her primary residence until July 1 of year 4 when she sold the home for $675,000. If Alison's marginal ordinary tax rate is 25% what amount of tax will Alison pay on the $275,000 gain?

Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo: $\begin{array} { l r } \text { Insurance } & \$ 1,000 \\\text { Mortgage interest } & 7,500 \\\text { Property taxes } & 3,200 \\\text { Repairs and maintenance } & 800 \\\text { Utilities } & 1,700 \\\text { Depreciation } & 5,700\end{array}$ 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?

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

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

Ethan (single) purchased his home on July 1, 2005. On July 1, 2012 he moved out of the home. He rented the home until July 1, 2014 when he moved back into the home. On July 1, 2015 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2015 gross income?

Which of the following statements regarding personal and/or rental use of a home is false?

On July 1 of 2014, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%) . On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 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 2014?

Kimberly purchased a home on January 1, 2013 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 2013 and 2014 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2013, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2013, she made interest-only payments on this loan in the amount of $5,000 and during 2014, she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Kimberly paid during 2014 that she may deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

Taxpayers who purchased a home in 2008 and received the first-time home buyer tax credit must (with a few limited exceptions) pay the credit back to the government in subsequent years.

On November 1, 2014, Jamie (who is single) purchased and moved into her principal residence. In early 2015, Jamie was laid off from her job. On February 1, 2015, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in 2015?

When a taxpayer experiences a net loss from a nonresidence (rental property) :

A taxpayer who otherwise meets the ownership and use tests may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.

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: $\begin{array}{c}\begin{array}{l}\text{Insurance}\\\text{Mortgage interest}\\\text{Property taxes}\\\text{Repairs and maintenance}\\\text{Utilities}\\\text{Depreciation}\\\end{array}\begin{array}{lll}&&&&\end{array}\begin{array}{r}\$ 50 \\100 \\30 \\150 \\40 \\600\\\end{array}\end{array}$ 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?

Amelia is looking to refinance her home loan of $200,000. She has the option of (1) paying no discount points on the loan and paying interest at 7 percent or (2) paying two discount points on the loan and paying interest of 6 percent on the loan. Both options require Amelia to make interest-only payments for the first five years of the loan and pay back the loan over the 25 years after that (it is a 30-year loan). Amelia itemizes deductions irrespective of any interest expense she may pay. Amelia's marginal ordinary income tax rate is 25 percent. What is Amelia's break-even point in years (for simplicity, ignore time value of money concerns)?

Heidi (single) purchased a home on January 1, 2005 for $400,000. She lived in the home as her primary residence until January 1, 2012 when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2013 (she used a different home as her primary residence from January 1, 2012 to January 1, 2013). On January 1, 2013, Heidi moved back into the home and used it as her primary residence until January 1, 2014 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 2014?

Lauren purchased a home on January 1, 2014 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. During 2014, Lauren made interest-only payments on the loan. On July 1, 2014, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2014, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies) ?

Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo: $\begin{array} { l r } \text { Insurance } & \$ 1,300 \\\text { Mortgage interest } & 8,000 \\\text { Property taxes } & 2,000 \\\text { Repairs and maintenance } & 900 \\\text { Utilities } & 2,200 \\\text { Depreciation } & 10,000\end{array}$ 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?

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.