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Exam 14: Tax Consequences of Home Ownership

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Question 21

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Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo: $\begin{array} { l r } \text { Insurance } & \$ 1,500 \\\text { Mortgage interest } & 8,500 \\\text { Property taxes } & 4,000 \\\text { Repairs and maintenance } & 950 \\\text { Utilities } & 1,900 \\\text { Depreciation } & 5,500\end{array}$ 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?

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Question 22

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

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Question 23

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Jessica purchased a home on January 1, 2013 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 2013 and 2014, Jessica made interest-only payments on the loan of $18,000 (each year) . On July 1, 2013, 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 2013, she made interest-only payments on this loan in the amount of $5,000. During 2014, 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 2014 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?

A personal residence is not a capital asset.

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 personal use.

Ilene rents her second home. During 2014, 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 2014?

When a taxpayer rents a residence for part of the year, the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer's:

Katy owns a second home. During 2014, 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?

Braxton 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. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants) ?

Taxpayers with home offices and 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 AGI.

A tax loss from a rental home is a passive activity loss.

On March 31, 2014, 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 2014 for her points paid?

Rafael and Sandra Gonzalez purchased a home on January 1 of year 1 for $400,000 by paying $40,000 down and borrowing the remaining $360,000 with a 6 percent loan secured by the home. The loan requires interest-only payments for the first five years. In year 2, when the home was valued at $400,000, Rafael and Sandra took out a second loan secured by the home for $80,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. In year 2, Rafael and Sandra paid $21,600 of interest expense on the first loan and $6,400 of interest on the second loan. What is the maximum amount of the $28,000 of interest expense may Rafael and Sandra deduct in year 2?

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.

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.

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?

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?

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

Depending on AGI, taxpayers may be able to deduct mortgage insurance premiums as a for AGI deduction.

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?