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Exam 14: Tax Consequences of Home Ownership

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Question 51

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In year 1, Abby purchased a new home for $200,000 by making a down payment of$150,000 and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, year 4 the outstanding balance on the loan was $40,000. OnJanuary 1, year 4, when her home was worth $300,000, Abby refinanced the home bytaking out a $120,000 mortgage at 5 percent. With the loan proceeds, she paid off the$40,000 balance of the existing mortgage and used the remaining $80,000 for purposes unrelated to the home. During year 4, she made interest-only payments on the new loan of $6,000. What amount of the $6,000 interest expense on the new loan can Abby deduct in year 4 on the new mortgage as home related interest expense?

A) $0.
B) $6,000.
C) $5,000.
D) $2,000.

E) B) and D)
F) All of the above

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Question 52

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Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo: During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assuming Tyson uses the Tax Court method of allocating expenses to rentaluse of the property. What is Tyson's net rental income for the year (assume this is not a leap year)?

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Question 53

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Darren (single) purchased a home on January 1, 2013 for $400,000. Darren lived in the home as his primary residence until January 1, 2015 when he began using the home as a vacation home. He used the home as a vacation home until January 1 2016 (he used a different home as his primaryresidence from January 1, 2015 to January 1, 2016). On January 1, 2016, Darren moved back into the home and used it as his primary residence until January 1, 2017 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 2017?

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?

In year 1, Jaspreet purchased a new home for $500,000 by making a down payment of$400,000 and financing the remaining $100,000 with a loan, secured by the residence, at6 percent. In year 3, Jaspreet made interest only payments of $6,000 on the $100,000loan. On January 1, year 3 when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home) . The first (early in the day) was for$80,000 at an interest rate of 9 percent. The second home equity loan from a different bank (later in the day) was for $40,000 at an interest rate of 7 percent. In year 3, Jaspreet paid $7,200 of interest payments on the first home equity loan and $2,800 interest expense on the second. Jaspreet used the proceeds from both home-equity loans forpurposes unrelated to the home. What is the maximum amount of interest expenseJaspreet can deduct on these loans as home related interest expense?

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 $500,000Jessica 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 theproceeds of the second loan to finish the basement in her home and landscape her yard?

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 gainattributable 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.

A taxpayer who otherwise meets the ownership and use tests may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.

Ethan (single) purchased his home on July 1, 2008. On July 1, 2015 he moved out of the home. He rented the home until July 1, 2017 when he moved back into the home. OnJuly 1, 2018 he sold the home and realized a $210,000 gain. What amount of the gain isEthan allowed to exclude from his 2018 gross income?

Heidi (single) purchased a home on January 1, 2007 for $400,000. She lived in the home as her primary residence until January 1, 2015 when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2016 (she used a different home as her primary residence from January 1, 2015 to January 1, 2016). On January 1, 2016, Heidi moved back into the home and used it as her primary residence until January 1, 2017 when she sold the home for$700,000. What amount of the $300,000 gain Heidi realized on the sale must she recognize for tax purposes in 2017?

Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo: During the year, Ashton rented the condo for 120 days and he received $24,000 of rental receipts. He did not use the condo at all for personal purposes during the year. Ashton is considered to be an activeparticipant in the property. Ashton's AGI from all sources other than the rental property is $120,000. Ashton does not have passive income from any other sources. What is Ashton's AGI?

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

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

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

Jasper is looking to purchase a new home for $250,000. He is paying $50,000 as a down payment on the home and financing the remaining $200,000 with a loan secured by the home. He has the option of (1) paying no discount points on the loan and paying interest at 6.5 percent or (2) paying onediscount point on the loan and paying interest of 5.5 percent on the loan. Both options require Jasper to make interest-only payments for the first five years of the loan and to pay the loan principal over the 25 years after that (it is a 30-year loan). Jasper itemizes deductions irrespective of any interest expense he may pay. Jasper's marginal ordinary income tax rate is 28 percent. What is Jasper'sbreak-even point in years (for simplicity, ignore time value of money concerns)?

Larry owned and lived in a home for five years before marrying Darlene. Larry and Darlene lived in the home for one year before selling it at a $600,000 gain. Larry was the sole owner of the residence until it was sold. How much of the gain may Larry and Darlene exclude?

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

Taxpayers using the simplified method for computing home office expenses do not deduct depreciation expense for the home office use.

Jacoby purchases a home 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. Jacoby can deduct interest expense on $1,100,000 of the loan principal.

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?