Exam 14: Tax Consequences of Home Ownership

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

Serena is single. She purchased her principal residence three years ago. She lived in the home until she sold it at a $300,000 gain this year. Serena was allowed to exclude $250,000 of the $300,000 gain. What is the character of the $50,000 gain she was not able to exclude?

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 the rental 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?

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

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.

When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

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

On March 31, year 1, Mary borrowed $200,000 to buy 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. What is Mary's year 1 deduction for her points paid?

The amount of a taxpayer's itemized deduction for all taxes combined, including state income taxes and real property taxes, is limited to $10,000 ($5,000 if married filing separately). 

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

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

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?

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).

A taxpayer who otherwise meets the ownership and use tests may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.

Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo: During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assuming Tyson uses the Tax Court method of allocating expenses to rental use of the property. What is Tyson's net rental income for the year (assume this is not a leap year)?

In terms of allocating expenses between rental use and personal use, the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

Jacoby purchased a home in 2016 for $1,500,000 by making a $150,000 down payment and by borrowing the remaining $1,350,000 with a loan secured by the home. He made interest only payments for 2016, 2017, and 2018. In 2018, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

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

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.