Exam 14: Tax Consequences of Home Ownership

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to personal use and to rental use.

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 32 percent.What is Jasper's break-even point in years? (For simplicity,ignore time value of money concerns.)

Taxpayers using the simplified method for computing home office expenses do not deduct depreciation expense for the home office use.

Patrick purchased a home on January 1,2019,for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan,secured by the residence,at 6 percent.During 2019,Patrick made interest-only payments on the loan of $30,000.On July 1,2019,when his home was worth $600,000,Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent.He used the $75,000 loan proceeds to purchase a new car.During 2019,he made interest-only payments on this loan in the amount of $3,000.What amount of the $33,000 interest expense that Patrick paid during 2019 may he deduct as an itemized deduction?

On April 1,year 1,Mary borrowed $200,000 to refinance the original mortgage on 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.How much can Mary deduct in year 1 for her points paid?

On July 1 of year 1,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,year 1,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 year 1? (Assume not married filing separately.)

A tax loss from a rental home is a passive activity loss.

Taxpayers with home offices who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use.Only expenses allocated to the home office use are deductible.

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 2 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 32 percent.What is Amelia's break-even point in years? (For simplicity,ignore time value of money concerns.)

For a home to be considered a rental (nonresidence)property,a taxpayer must:

The tax law places a fixed dollar limit on the amount of home mortgage interest a taxpayer may deduct in a particular year.

In general,total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (that is,they are limited to net Schedule C income before home office expenses).

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

The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for three or more years during the five-year period ending on the date of sale.

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 rental use.

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

A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Under the tax law,a taxpayer's itemized deduction for home mortgage interest in any one particular year is limited to $10,000.

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

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?