Exam 14: Tax Consequences of Home Ownership

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

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.

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?

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

Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct?

In order to be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet which of the following test(s)?

Patrick purchased a home on January 1, year 1 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 year 1, Patrick made interest-only payments on the loan of $30,000. On July 1, year 1, when his home was worth $600,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent. During year 1, he made interest-only payments on this loan in the amount of $3,000. What amount of the$33,000 interest expense Patrick paid during year 1 may he deduct as an itemized deduction?

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

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. OnJanuary 1, year 4, when his home was worth $300,000, Kris refinanced the home bytaking 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?

Lauren purchased a home on January 1, year 1 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 year 1, Lauren made interest-only payments on the loan. On July 1, year 1, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During year 1, 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 exact method to determine deductible interestexpense if a limitation applies)?

In year 1, Gabby purchased a new home for $500,000 by making a down payment of$200,000 and financing the remaining $300,000 with a loan, secured by the residence, at6 percent. In year 3, Gabby made interest-only payments of $18,000 on the $300,000loan. On January 1, year 3, Gabby executed two home equity loans (both secured by the home). The first was for $80,000 at an interest rate of 7 percent. The second home equity loan from a different bank (later in the day) was for $40,000 at an interest rate of 9 percent. In year 3, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home. What is the maximum amount of interest expense Gabby candeduct on these loans as home related interest expense?

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

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?

Robin purchased a home on July 1, year 1 for $300,000. She paid $200,000 down and financed the remaining $100,000. On January 1, year 6 when the outstanding balance of her mortgage was$85,000 and her home was valued at $300,000, she refinanced her home for $250,000. With the$250,000 loan, she paid off the remaining $85,000 balance of her original mortgage, she used$70,000 to substantially improve her home and she used the remaining $95,000 for purposesunrelated to her home. During year 6, Robin made interest only payments of $12,500 on the loan. What amount of the $12,500 interest expense is Robin allowed to deduct in year 6?

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.

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 personallyused the condo for 50 days. Assuming Careen uses the IRS method of allocating expenses to rental use of the property. What is Careen's net rental income for the year?

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

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is based on the number of rental days over rental days plus personal use days.

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.

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.