Exam 14: Tax Consequences of Home Ownership

Kimberly purchased a home on January 1, 2013 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, at 6 percent. During 2013 and 2014 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2013, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2013, she made interest-only payments on this loan in the amount of $5,000 and during 2014, she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Kimberly paid during 2014 that she may deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

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.

Renting a residence may have nontax advantages over owning a home.

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

Depending on AGI, taxpayers may be able to deduct mortgage insurance premiums as a for AGI deduction.

Lebron Taylor purchased a home on July 1, 2013 for $500,000. Lebron paid for the entire purchase price with cash. In July of 2013, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During 2014, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2014?

Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in connection with her condo: Insurance \ 1,250 Mortgage interest 7,000 Property taxes 2,100 Repairs and maintenance 800 Utilities 2,300 Depreciation 9,000 During the year, Rayleen rented the condo for 130 days and she received $25,000 of rental receipts. She did not use the condo at all for personal purposes during the year. Rayleen is considered to be an active participant in the property. Rayleen's AGI from all sources other than the rental property is $130,000. Rayleen does not have passive income from any other sources. What is Rayleen's AGI?

In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

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?

Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo: Insurance \ 1,500 Mortgage interest 8,500 Property taxes 4,000 Repairs and maintenance 950 Utilities 1,900 Depreciation 5,500 During the year, Careen rented the condo for 90 days, receiving $20,000 of gross income. She personally used the condo for 50 days. Assuming Careen uses the IRS method of allocating expenses to rental use of the property. What is Careen's net rental income for the year?

In 2012, Gabby purchased a new home for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. In 2014, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, 2014, Gabby executed two home equity loans (both secured by the home). The first was for $80,000 at an interest rate of 7 percent. The second home equity loan from a different bank was for $40,000 at an interest rate of 9 percent. In 2014, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home. What is the maximum amount of interest expense Gabby can deduct on these loans as home related interest expense?

Dawn (single) purchased her home on July 1, 2005. On July 1, 2013 Dawn moved out of the home. She rented out the home until July 1, 2014 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2014 gross income?

Jasper is looking to purchase a new home for $250,000. He is paying $50,000 as a down payment on the home and financing the remaining $200,000 with a loan secured by the home. He has the option of (1) paying no discount points on the loan and paying interest at 6.5 percent or (2) paying one discount point on the loan and paying interest of 5.5 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 28 percent. What is Jasper's break-even point in years (for simplicity, ignore time value of money concerns)?

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

Which of the following statements regarding the IRS and/or Tax Court approaches to allocating home-related expenses between rental use and personal use is correct?

Alfredo is self-employed and he uses a room in his home as his principal place of business. He meets clients there and doesn't use the room for any other purpose. The size of his home office is 600 square feet. The size of his entire home is 3,000 square feet. During the current year, Alfredo received $10,000 of gross income from his business activities and he reports $7,500 of business expenses unrelated to his home office. For his entire home, he reported $10,000 of mortgage interest, $2,000 of property taxes, $2,500 of home operating expenses, and $4,500 of depreciation expense. What amount of home office expenses is Alfredo allowed to deduct in the current year (assume he uses the actual expense method of computing home office expenses)? Indicate the amount and type of expenses he must carry over to next year, if any.

Amanda purchased a home for $1,000,000 in 2003 She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in 2014 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing. What is her total amount of qualifying home-related debt for tax purposes?

Robin purchased a home on July 1, 2009 for $300,000. She paid $200,000 down and financed the remaining $100,000. On January 1, 2014 when the outstanding balance of her mortgage was $85,000 and her home was valued at $300,000, she refinanced her home for $250,000. With the $250,000 loan, she paid off the remaining $85,000 balance of her original mortgage, she used $70,000 to substantially improve her home and she used the remaining $95,000 for purposes unrelated to her home. During 2014, Robin made interest only payments of $12,500 on the loan. What amount of the $12,500 interest expense is Robin allowed to deduct in 2014?

Ilene rents her second home. During 2014, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in 2014?

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.