Exam 14: Tax Consequences of Home Ownership

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.

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.

For regular tax purposes, a taxpayer may deduct interest expense on qualifying home equity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home.

Taxpayers with home offices and who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible for AGI.

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?

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 personal use.

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

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

Patrick purchased a home on January 1, 2014 for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 Patrick made interest-only payments on the loan of $30,000. On July 1, 2014, when his home was worth $600,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent. During 2014, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expense Patrick paid during 2014 may he deduct as an itemized deduction?

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).

Andrew Whiting (single) purchased a home in Boise, Idaho for $300,000. He moved into the home on July 1 of year 1. He lived in the home as his primary residence until November 1, year 2 when he sold the home for $470,000. Andrew sold the home because he was changing jobs and his new job was in a different state. What amount of gain must Andrew recognize on the home sale in year 2?

A personal residence is not a capital asset.

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?

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)?

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?

Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct?

Jacoby purchases a home 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. Jacoby can deduct interest expense on $1,100,000 of the loan principal.

A taxpayer who is financing his personal residence and who pays points on the loan in the form of prepaid interest generally must deduct the points over the life of the loan no matter whether the loan is an original loan or a refinance of an existing loan.

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

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