Exam 14: Tax Consequences of Home Ownership

Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo: 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?

Patrick purchased a home on January 1, 2020, 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 2020, Patrick made interest-only payments on the loan of $30,000. On July 1, 2020, 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 2020, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expensethat Patrick paid during 2020 may he deduct as an itemized deduction?

Which of the following statements regarding the home mortgage interest expense deduction 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 year relating 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)?

Michael (single)purchased his home on July 1, 2010. He lived in the home as his principal residence until July 1, 2018, when he moved out of the home, and rented it out until July 1, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2020 gross income?

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

Jasper is looking to purchase a new home for $260,000. He is paying $52,000 as a down payment on the home and financing the remaining $208,000 with a loan secured by the home. He has the option of (1)paying no discount points on the loan and paying interest at 6.9 percent or (2)paying one discount point on the loan and paying interest of 5.9 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.)

When a taxpayer rents a residence for part of the year, the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer's:

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

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.

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 participant in 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?

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.

On July 1 of year 1, Elaine purchased a new home for $795,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $15,900 ($795,000 × 2%). On the settlement statement, Elaine was charged $7,950 for the year in property taxes and the seller was charged $7,950. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $16,900. Elaine wrote a $16,900 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.)

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort)to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in direct expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?

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.

A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo: (Round your intermediate and final answer to whole number.) During the year, Careen rented the condo for 90 days, receiving $23,250 of gross income. She personally used the condo for 50 days. Careen itemizes deductions, and the sum of her itemized deduction for non-home business taxes and the real property taxes allocated to business use of the home is less than $10,000. 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?

On April 1, year 1, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 1 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?

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

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.)