Exam 14: Tax Consequences of Home Ownership

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in direct expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?

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

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.

Which of the following statements regarding the home mortgage interest expense deduction is false for a single taxpayer?

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?

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.

When determining the number of days a taxpayer has rented out 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.

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.

For tax purposes a dwelling unit is a residence if the taxpayer's number of personal use days of the unit is more than ten days.

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?

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

Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

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

Several years ago, Chara acquired a home that she vacationed in part of the time and she rented part of the time. During the current year Chara: -Personally stayed in the home for 14 days, -Rented it at full fair market value to her parents for eight days, -Rented it to her sister for five days at half price, -Rented it to her friend at a discounted rate for three days, -Rented it to another friend at fair market value for six days, -Rented the home to third parties for 42 days at the market rate, -Did repair and maintenance work for three days to keep the home ready for renters, and -Marketed the property and made it available for rent for 120 days during the year even though it was not rented during this time. How many days of personal use and how many days of rental use did Chara experience on the property during the year?

Jacoby purchased a home in 2016 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. He made interest only payments for 2016, 2017, and 2018. In 2018, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

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?

Leticia purchased a home on July 1, 2017 for $200,000. She paid $180,000 down and financed the remaining $20,000. On January 1, 2019 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 2021, 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 2021?

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

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

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? (Assume not married filing separately.)