Exam 14: Tax Consequences of Home Ownership

Leticia purchased a home on July 1,2017,for $200,000.She paid $180,000 down and financed the remaining $20,000.On January 1,2019,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 2021,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 2021?

Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence.

Michael (single)purchased his home on July 1,2009.He lived in the home as his principal residence until July 1,2017,when he moved out of the home,and rented it out until July 1,2018,when he moved back into the home.On July 1,2019,he sold the home and realized a $300,000 gain.What amount of the gain is Michael allowed to exclude from his 2019 gross income?

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

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

Which of the following statements regarding the home mortgage interest expense deduction is correct?

Ilene rents her second home for the entire year.During the year,Ilene reported a net loss of $15,000 from the rental.If Ilene is an active participant in the rental and her AGI is $140,000,how much of the loss can she deduct against ordinary income in the year?

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? (Assume married filing jointly.)

Careen owns a condominium near Newport Beach in California.This year,she incurs the following expenses in connection with her condo: During the year,Careen rented the condo for 90 days,receiving $20,000 of gross income.She personally used the condo for 50 days.Assume Careen uses the IRS method of allocating expenses to rental use of the property.What is Careen's net rental income for the year?

Mercury is self-employed and she uses a room in her home as her principal place of business.She meets clients there and doesn't use the room for any other purpose.The size of her home office is 400 square feet.The size of her entire home is 2,400 square feet.During the year,Mercury received $6,300 of gross income from her business activities and she reported $2,500 of business expenses unrelated to her home office.For her entire home in the current year,she reported $3,500 of mortgage interest,$1,000 of property taxes,$600 of insurance,$500 of utilities and other operating expenses,and $3,200 of depreciation expense.What amount of home office expenses is Mercury allowed to deduct in the current year using the actual expense method? Indicate the amount and type of expenses she must carry over to the next year,if any.What amount of home office expenses is Mercury allowed to deduct in the current year using the simplified method?

Which of the following statements regarding the home mortgage interest expense deduction is correct?

Dawn (single)purchased her home on July 1,2008.On July 1,2018,Dawn moved out of the home.She rented out the home until July 1,2019,when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation).What amount of the gain is Dawn allowed to exclude from her 2019 gross income?

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?

Serena is single.She purchased her principal residence three years ago.She lived in the home until she sold it at a $300,000 gain this year.Serena was allowed to exclude $250,000 of the $300,000 gain.What is the character of the $50,000 gain she was not able to exclude?

In terms of allocating expenses between rental use and personal use,the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

Heidi (single)purchased a home on January 1,2009,for $400,000.She lived in the home as her primary residence until January 1,2017,when she began using the home as a vacation home.She used the home as a vacation home until January 1,2018.(She used a different home as her primary residence from January 1,2017,to January 1,2018.)On January 1,2018,Heidi moved back into the home and used it as her primary residence until January 1,2019,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 2019?

A personal residence is not a capital asset.

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.

Darren (single)purchased a home on January 1,2015,for $400,000.Darren lived in the home as his primary residence until January 1,2017,when he began using the home as a vacation home.He used the home as a vacation home until January 1,2018.(He used a different home as his primary residence from January 1,2017,to January 1,2018.)On January 1,2018,Darren moved back into the home and used it as his primary residence until January 1,2019,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 2019?

Andrew Whiting (single)purchased a home in Boise,Idaho,for $300,000.He moved into the home on July 1 of year 1.He lived in the home as his primary residence until November 1,year 2,when he sold the home for $470,000.Andrew sold the home because he was changing jobs and his new job was in a different state.What amount of gain must Andrew recognize on the home sale in year 2?