Exam 14: Tax Consequences of Home Ownership

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

Amelia is looking to refinance her home loan of $200,000.She has the option of (1)paying no discount points on the loan and paying interest at 7 percent or (2)paying two discount points on the loan and paying interest of 6 percent on the loan.Both options require Amelia to make interest-only payments for the first five years of the loan and pay back the loan over the 25 years after that (it is a 30-year loan).Amelia itemizes deductions irrespective of any interest expense she may pay.Amelia's marginal ordinary income tax rate is 25 percent.What is Amelia's break-even point in years (for simplicity,ignore time value of money concerns)?

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

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 is 400 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 of mortgage 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?

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?

The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may deduct in a particular year.

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?

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

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

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 interest expense if a limitation applies)?  

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 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.