Exam 14: Tax Consequences of Home Ownership

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)

A taxpayer who sells a principal residence that has been used (or is being used) as a rental property since 2005 will not be allowed to exclude the portion of the gain attributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

Joshua and Mary Sullivan purchased a new home on October 1 of year 1 for $400,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be 1 percent of the property's value. Because the taxing jurisdiction collects taxes on a July 1 year-end, it was estimated that the Sullivans would be required to pay $3,000 in property taxes for the property tax year relating to October through June of year 2 ($400,000 × 1% × 9/12). The seller would be required to pay the $1,000 for July through September of year 1. Along with their monthly payment of principal and interest, the Sullivans paid $333 a month to the mortgage company to cover the property taxes. The mortgage company placed the money in escrow and used the escrow funds to pay the $3,000 property tax bill in July of year 2. The Sullivans' itemized deductions exceed the standard deduction before considering property taxes. What amount are the Sullivans allowed to deduct for property taxes relating to the property in year 1 (ending July 1, year 1) and year 2? (ending July 1, year 2)

Which of the following statements regarding home-related transactions is correct?

Robin purchased a home on July 1, year 1 for $300,000. She paid $200,000 down and financed the remaining $100,000. On January 1, year 6 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 year 6, 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 year 6?

Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in connection with her condo: 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?

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?

Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo: 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?

Which of the following statements regarding personal and/or rental use of a home is false?

Lauren purchased a home on January 1, year 1 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. During year 1, Lauren made interest-only payments on the loan. On July 1, year 1, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During year 1, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct? (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies)

Lebron Taylor purchased a home on July 1, year 1 for $500,000. Lebron paid for the entire purchase price with cash. In July of year 1, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During year 2, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in year 2?

When a taxpayer experiences a net loss from a nonresidence (rental property):

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

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?

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and to the rental use.

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?

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

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

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.

A personal residence is not a capital asset.