Exam 14: Tax Consequences of Home Ownership

A taxpayer may be required to pay tax on a gain the taxpayer realizes when she sells her principal residence.

Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.

Don owns a condominium near Orlando, California. This year, he incurs the following expenses in connection with his condo: Insurance \ 1,300 Mortgage interest 10,000 Property taxes 3,000 Repairs and maintenance 900 Utilities 2,200 Depreciation 12,000 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?

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 incorrect?

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, 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).

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

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?

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

On March 31, 2014, 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 2014 deduction for her points paid?

Michael (single) purchased his home on July 1, 2004. On July 1, 2012 he moved out of the home. He rented out the home until July 1, 2013 when he moved back into the home. On July 1, 2014 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2014 gross income?

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.

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home.

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

The longer a taxpayer plans on living in a home without refinancing, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.