Exam 14: Tax Consequences of Home Ownership

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: 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?

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 32 percent. What is Amelia's break-even point in years (for simplicity, ignore time value of money concerns)?

Harvey rents his second home. During the year, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income for the year?

Which of the following statements regarding a taxpayer's principal residence is true for purposes of determining whether the taxpayer is eligible to exclude gain realized on the sale of the residence?

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)?

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?

The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

Ethan (single) purchased his home on July 1, 2008. He lived in the home as his principal residence until July 1, 2015 when he moved out of the home and rented it out until July 1, 2017 when he moved back into the home. On July 1, 2018 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2018 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?

Which of the following statements regarding the home mortgage interest expense deduction is correct?

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 may be required to include in gross income gain the taxpayer realizes when she sells her principal residence.

What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?

On February 1, 2018 Stephen (who is single) sold his principal residence (home 1) at a $100,000 gain. He was able to exclude the entire gain on his 2018 tax return. Stephen purchased and moved into home 2 on the same day. Assuming Stephen lives in home 2 as his principal residence until he sells it, which of the following statements is true?

Darren (single) purchased a home on January 1, 2014 for $400,000. Darren lived in the home as his primary residence until January 1, 2016 when he began using the home as a vacation home. He used the home as a vacation home until January 1 2017 (he used a different home as his primary residence from January 1, 2016 to January 1, 2017). On January 1, 2017, Darren moved back into the home and used it as his primary residence until January 1, 2018 when he sold the home for $500,000. What amount of the $100,000 gain Darren realized on the sale must he recognize for tax purposes in 2018?

Serena is single. She purchased her principal residence three years ago. She lived in the home until she sold it at a $300,000 gain this year. Serena was allowed to exclude $250,000 of the $300,000 gain. What is the character of the $50,000 gain she was not able to exclude?

Ilene rents her second home. During the year, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in the year?

Lebron Taylor purchased a home on July 1, 2018 for $500,000. Lebron paid for the entire purchase price with cash. On January 1, 2019, Lebron needed additional cash for purposes unrelated to his home so he took out a loan secured by the residence for $150,000. During 2019, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2019?

A taxpayer who sells a principal residence that has been used as a rental property after 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.

The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for three or more years during the five year period ending on the date of sale.