Exam 14: Tax Consequences of Home Ownership

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?

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)?

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)?

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?

Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

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.

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?

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?

Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?

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

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?

Braxton 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. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?

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

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.

Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo: Insurance \ 1,300 Mortgage interest 8,000 Property taxes 2,000 Repairs and maintenance 900 Utilities 2,200 Depreciation 10,000 During the year, Ashton rented the condo for 120 days and he received $24,000 of rental receipts. He did not use the condo at all for personal purposes during the year. Ashton is considered to be an active participant in the property. Ashton's AGI from all sources other than the rental property is $120,000. Ashton does not have passive income from any other sources. What is Ashton's AGI?

In terms of allocating expenses between rental use and personal use, the IRS method tends to allocate more expenses to personal use than does the Tax Court method.

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

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.

Kristen rented out her home for 10 days during the year for $5,000. She used the home for personal purposes for the other 355 days. She allocated the following home expenses to the rental use of the home: Insurance $\quad\quad\quad\quad\quad\quad\quad \$ 50$ Mortgage interest $\quad\quad\quad\quad \$ 100$ Property taxes $\quad\quad\quad\quad\quad \$ 30$ Repairs and maintenance $\quad\quad \$ 150$ Utilities $\quad\quad\quad\quad\quad\quad\quad\quad\$ 40$ Depreciation $\quad\quad\quad\quad\quad\quad \$ 600$ Kristen's AGI is $120,000 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?

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