Exam 14: Tax Consequences of Home Ownership

Which of the following statements regarding interest expense on home-related debt is correct?

In order to be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet which of the following test(s)?

Taxpayers with home offices 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.

On July 1 of year 1, 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, year 1 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 year 1?

Taxpayers with high AGI are not allowed to deduct any interest on qualifying home equity indebtedness.

Ethan (single) purchased his home on July 1, 2007. On July 1, 2014 he moved out of the home. He rented the home until July 1, 2016 when he moved back into the home. On July 1, 2017 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2017 gross income?

Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 400 square feet. The size of her entire home is 2,400 square feet. During the year, Mercury received $6,300 of gross income from her business activities and she reported $2,500 of business expenses unrelated to her home office. For her entire home in the current year, she reported $3,500 of mortgage interest, $1,000 of property taxes, $600 of insurance, $500 of utilities and other operating expenses, and $3,200 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in the current year using the actual expense method? Indicate the amount and type of expenses she must carry over to the next year, if any. What amount of home office expenses is Mercury allowed to deduct in the current year using the simplified method?

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.

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)

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

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?

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

For a home to be considered a rental (nonresidence) property, a taxpayer must:

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

Leticia purchased a home on July 1, year 1 for $200,000. She paid $180,000 down and financed the remaining $20,000. On January 1, year 3 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 year 5, Leticia made interest-only payments of $15,000 on the loan. What amount of the $15,000 interest expense is Leticia allowed to deduct in year 5?

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).

In year 1, 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 year 3, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, year 3, 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 (later in the day) was for $40,000 at an interest rate of 9 percent. In year 3, 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?

On April 1, year 1, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. How much can Mary deduct in year 1 for her points paid?

Jessica 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, at 6 percent. During year 1 and year 2, Jessica made interest-only payments on this loan of $18,000 (each year). On July 1, year 1, 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 year 1, she made interest-only payments on the second loan in the amount of $5,000. During year 2, she made interest only on the second loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during year 2 may she deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard?

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.