Exam 14: Tax Consequences of Home Ownership

Rafael and Sandra Gonzalez purchased a home on January 1 of year 1 for $400,000 by paying$40,000 down and borrowing the remaining $360,000 with a 6 percent loan secured by the home. The loan requires interest-only payments for the first five years. In year 2, when the home was valued at $400,000, Rafael and Sandra took out a second loan secured by the home for $80,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. In year 2, Rafael and Sandra paid $21,600 of interest expense on the first loan and $6,400 of interest on the second loan. What is the maximum amount of the $28,000 of interest expense may Rafael and Sandra deduct in year 2?

Don owns a condominium near Orlando, California. This year, he incurs the following expenses in connection with his condo: During the year, Don rented the condo for 70 days and he received $17,400 of rental receipts. He did not use the condo at all for personal purposes during the year. Don is considered to be an active participantin the property. Don's AGI from all sources other than the rental property is $140,000. Don does not have passive income from any other sources. What is Don's AGI?

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 is400 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 ofmortgage 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?

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

Harvey rents his second home. During the year, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income for the year?

Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is false?

For tax purposes a dwelling unit is a residence if the taxpayer's number of personal usedays of the unit is more than ten days.

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

For determining whether a taxpayer qualifies to exclude gain on the sale of a principal residence, the periods of ownership and use need not be continuous nor do they need to cover the same two-year period.

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 is600 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 mortgageinterest, $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.

A personal residence is not a capital asset.

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

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

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

What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

Joshua and Mary Sullivan purchased a new home on October 1 of year 1 for $400,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be 1 percent of the property's value. Because the taxing jurisdiction collects taxes on a July 1 year-end, it was estimated that the Sullivans would be required to pay $3,000 in property taxes for the property tax yearrelating to October through June of year 2 ($400,000 × 1% × 9/12). The seller would be required to pay the $1,000 for July through September of year 1. Along with their monthly payment of principal and interest, the Sullivans paid $333 a month to the mortgage company to cover the property taxes. The mortgage company placed the money in escrow and used the escrow funds to pay the $3,000 property tax bill in July of year 2. The Sullivans' itemized deductions exceed the standard deduction before considering property taxes. What amount are the Sullivans allowed to deduct for property taxes relating to the property in year 1 (ending July 1, year 1) and year 2 (ending July 1, year 2)?

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 therental 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?

Expenses of a vacation home allocated to rental use are deductible for AGI.

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