Exam 14: Tax Consequences of Home Ownership

Nelson Whiting (single)purchased a home in Denver, Colorado, for $300,000. He moved into the home on July 1 of year 1. He lived in the home as his primary residence until December 1, year 2, when he sold the home for $450,000. Nelson sold the home because he needed to move to change jobs and his new job was located several hundred miles away. What amount of gain must Nelson recognize on the home sale in year 2?

Jessica purchased a home on January 1, 2020, for $720,000 by making a down payment of $290,000 and financing the remaining $430,000 with a loan, secured by the residence, at 6 percent. During 2020 and 2021, Jessica made interest-only payments on this loan of $25,800 (each year). On July 1, 2020, when her home was worth $720,000, Jessica borrowed an additional $180,000 secured by the home at an interest rate of 8 percent. During 2020, she made interest-only payments on the second loan in the amount of $7,200. During 2021, she made interest-onlypayments on the second loan in the amount of $14,400. What is the maximum amount of the $40,200 interest expense Jessica paid during 2021 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

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

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. What is the maximum amount of gain that Larry and Darlene may exclude?

Kristen rented out her home for 6 days during the year for $6,950. She used the home for personal purposes for the other 359 days. She allocated the following home expenses to the rental use of the home: Kristen's AGI is $193,500 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?

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.

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

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

In year 1, Abby 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. On January 1, year 4, when her home was worth $300,000, Abby refinanced the home by taking out a $120,000 mortgage at 5 percent. With the loan proceeds, she paid off the $40,000 balance of the existing mortgage and used the remaining $80,000 for purposes unrelated to the home. During year 4, she made interest-only payments on the new loan of $6,000. What amount of the $6,000 interest expense on the new loan can Abby deduct in year 4 on the new mortgage as home-related interest expense?

Jason and Alicia Johnston purchased a home in Austin, Texas, for $637,500. 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 $701,250. What amount of the $63,750 gain are they allowed to exclude? (Assume married filing jointly.)

Katy owns a second home. During the year, she used the home for 20 personal-use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home?

Tyson owns a condominium near Laguna Beach, California. In 2020, he incurs the following expenses in connection with his condo: (Round your intermediate and final answer to whole number.) During the year, Tyson rented the condo for 100 days, receiving $35,000 of gross income. He personally used the condo for 60 days. Assume Tyson uses the Tax Court method of allocating expenses to rental use of the property. Tyson itemizes deductions, and the sum of his itemized deduction for non-home business taxes and the real property taxes allocated to rental use of the home is less than $10,000. What is Tyson's net rental income for the year (assume this is not a leap year)?

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 $20,000 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?

Harvey rents his second home. During the year, Harvey reported a net loss of $46,000 from the rental. If Harvey is an active participant in the rental and his AGI is $82,400, how much of the loss can he deduct against ordinary income for the year?

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.

Patricia purchased a home on January 1, 2017, for $1,200,000 by making a down payment of $100,000 and financing the remaining $1,100,000 with a loan, secured by the residence, at 6 percent. From 2017 through 2020, Patricia made interest-only payments on the loaneach year in the amount of $66,000. What amount of the $66,000 interest expensethat Patricia paid during 2020 may she deduct as an itemized deduction? (Assume not married filing separately.)

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?

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

Ethan (single)purchased his home on July 1, 2010. 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, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his gross income?

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 $360,000 gain. What amount of the gain is Michael allowed to exclude from his 2020 gross income?