Exam 14: Tax Consequences of Home Ownership

Leticia purchased a home on July 1, 2010 for $200,000. She paid $180,000 down and financed the remaining $20,000. On January 1, 2012 when the outstanding balance of her mortgage was $15,000 and her home was valued at $300,000, Leticia refinanced her home for $200,000. With the $200,000 loan, she paid off the remaining $15,000 balance of her original mortgage, she used $35,000 to substantially improve her home and she used the remaining $150,000 for purposes unrelated to her home. During 2014, Leticia made interest-only payments of $15,000 on the loan. What amount of the $15,000 interest expense is Leticia allowed to deduct?

On July 1 of 2014, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year (Elaine was liable for the taxes because she owned the property when they became due). What amount of real property taxes is Elaine allowed to deduct for 2014?

Shantel owned and lived in a home for five years before marrying Daron. Shantel and Daron lived in the home for two years before selling it at a $700,000 gain. Shantel was the sole owner of the residence until it was sold. How much of the gain may Shantel and Daron exclude?

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 was changing jobs and his new job was in a different state. What amount of gain must Nelson recognize on the home sale in year 2?

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?

Jessica 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, Jessica made interest-only payments on the loan of $18,000 (each year). On July 1, 2013, when her home was worth $500,000 Jessica 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. During 2014, she made interest only payments in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2014 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home, landscape the yard, and add a home theater room in the basement of the home?

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?

Darren (single) purchased a home on January 1, 2010 for $400,000. Darren lived in the home as his primary residence until January 1, 2012 when he began using the home as a vacation home. He used the home as a vacation home until January 1 2013 (he used a different home as his primary residence from January 1, 2012 to January 1, 2013). On January 1, 2013, Darren moved back into the home and used it as his primary residence until January 1, 2014 when he sold the home for $500,000. What amount of the $100,000 gain Darren realized on the sale must he recognize for tax purposes in 2014?

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

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.

Heidi (single) purchased a home on January 1, 2005 for $400,000. She lived in the home as her primary residence until January 1, 2012 when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2013 (she used a different home as her primary residence from January 1, 2012 to January 1, 2013). On January 1, 2013, Heidi moved back into the home and used it as her primary residence until January 1, 2014 when she sold the home for $700,000. What amount of the $300,000 gain Heidi realized on the sale must she recognize for tax purposes in 2014?

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.

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)?

When determining the number of days a taxpayer has rented 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.

Expenses of a vacation home allocated to rental use are deductible for 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?

Katy owns a second home. During 2014, 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?

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

Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct (Jamison does not use the simplified method for determining the home office expense deduction)?

Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?