Exam 14: Tax Consequences of Home Ownership

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.

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

Michael (single) purchased his home on July 1,2003.On July 1,2011 he moved out of the home.He rented out the home until July 1,2012 when he moved back into the home.On July 1,2013 he sold the home and realized a $300,000 gain.What amount of the gain is Michael allowed to exclude from his 2013 gross income?

A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home.

A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.One spouse must meet the ownership test and both must meet the use test.

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

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?

Katy owns a second home.During 2013,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?

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

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day.Jennifer is required to allocate expenses associated with the home between rental and personal use.

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

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?

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

Jessica purchased a home on January 1,2012 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 2012 and 2013,Jessica made interest-only payments on the loan of $18,000 (each year) .On July 1,2012,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 2012,she made interest-only payments on this loan in the amount of $5,000.During 2013,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 2013 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?