Deck 14: Tax Consequences of Home Ownership

Question 1

A taxpayer can qualify for the home sale exclusion even if she has moved out of the home and is renting the home to another at the time of the sale.

Answer 1

True

Question 2

A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Jacoby purchased a homein 2017 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 2017, 2018, 2019 and 2020. In 2020, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

Question 5

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 rental use.

Question 6

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

Question 7

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for more than 14 days during the year is ineligible to deduct any home mortgage interest expense on a loan secured by the home.

Question 8

In certain circumstances, a taxpayer who does not meet the ownership and use tests may still be allowed to exclude the entire realized gain on the sale of a principal residence.

Question 9

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.

Question 10

At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.

Question 11

For determining whether a taxpayer qualifies to exclude gain on the sale of a principal residence, the periods of ownership and use need not be continuous nor do they need to cover the same two-year period.

Question 12

A personal residence is not a capital asset.

Question 13

Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence.

Question 14

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.

Question 15

To be allowed to exclude gain on the sale of a principal residence, the taxpayer selling the home must be using the home as a principal residence at the time of the sale.

Question 16

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

Question 17

For tax purposes a dwelling unit is a residence if the taxpayer's number of personal-use days of the unit is more than 10 days.

Question 18

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.

Question 19

The tax law places a fixed dollar limit on the amount of home mortgage interest a taxpayer may deduct in a particular year.

Question 20

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

Question 21

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home between personal and rental use.

Question 22

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to rental use is based on the number of rental days over rental days plus personal-use days.

Question 23

Under the tax law, a taxpayer's itemized deduction for home mortgage interest in any one particular year is limited to $10,000.

Question 24

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.

Question 25

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

Question 26

Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

Question 27

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.

Question 28

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.

Question 29

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

Question 30

Taxpayers with high AGI are not allowed to deduct home mortgage interest expense.

Question 31

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.

Question 32

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

Question 33

The amount of a taxpayer's itemized deduction for all taxes combined, including state and local income (or sales)taxes and non-foreign real property taxes, is limited to $10,000 ($5,000 if married filing separately).

Question 34

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.

Question 35

A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.

Question 36

Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.

Question 37

When a taxpayer finances the initial acquisition of her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

Question 38

In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (that is, they are limited to net Schedule C income before home office expenses).

Question 39

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

Question 40

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.

Question 41

On November 1, year 1, Jamie (who is single)purchased and moved into her principal residence. In the early part of year 2, Jamie was laid off from her job. On February 1, year 2, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in year 2?

A)$0.
B)$3,125.
C)$31,250.
D)$35,000.

Question 42

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

A)A taxpayer may have more than one principal residence at any one time.
B)A taxpayer's principal residence may not be a houseboat.
C)A taxpayer with more than one residence may annually elect which residence is considered to be the principal residence.
D)None of the choices are correct.

Question 43

Patrick purchased a home on January 1, 2020, for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 6 percent. During 2020, Patrick made interest-only payments on the loan of $30,000. On July 1, 2020, when his home was worth $600,000, Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent.He used the $75,000 loan proceeds to purchase a new car. During 2020, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expensethat Patrick paid during 2020 may he deduct as an itemized deduction?

A)$0.
B)$3,000.
C)$30,000.
D)$33,000.

Question 44

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. What is the maximum amount of gain that Shantel and Daron may exclude?

A)$0.
B)$250,000.
C)$500,000.
D)$700,000.

Question 45

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

A)Taxpayers may deduct interest expense on a limited amount of home equity indebtedness, but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.
B)Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.
C)What a bank might call a "home equity loan" the tax laws will call acquisition indebtedness if the loan is secured by the home and the taxpayer uses the loan proceeds to substantially improve the home.
D)None of the choices are correct.

Question 46

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

A)A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale.
B)A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.
C)A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion.
D)For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.

Question 47

Michael (single)purchased his home on July 1, 2010. He lived in the home as his principal residence until July 1, 2018, when he moved out of the home, and rented it out until July 1, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2020 gross income?

A)$0.
B)$225,000.
C)$250,000.
D)$300,000.

Question 48

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

A)Only the taxpayer's principal residence.
B)The taxpayer's principal residence and two other residences (chosen by the taxpayer).
C)The taxpayer's principal residence and one other residence (chosen by the taxpayer).
D)Any two residences chosen by the taxpayer.

Question 49

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:

A)personal use of the home exceeds the taxpayer's rental use of the home.
B)personal use of the home exceeds half of the taxpayer's rental use of the home.
C)personal use of the home exceeds the lesser of 14 days or 10 percent of the taxpayer's rental use of the home.
D)personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.

Question 50

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)?

A)Rental test.
B)Use test.
C)Ownership test.
D)Business use test.
E)Ownership and use test.

Question 51

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

A)$0.
B)$25,000.
C)$250,000.
D)$500,000.

Question 52

Michael (single)purchased his home on July 1, 2010. He lived in the home as his principal residence until July 1, 2018, when he moved out of the home, and rented it out until July 1, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $360,000 gain. What amount of the gain is Michael allowed to exclude from his 2020 gross income?

A)$0.
B)$225,000.
C)$250,000.
D)$360,000.

Question 53

Which of the following statements regarding home-related transactions is correct?

A)If a taxpayer converts a home from personal use to rental use, the basis of the rental property is the greater of the basis of the property at the time of the conversion or the fair market value of the property at the time of the conversion.
B)If a taxpayer uses a residence as a rental property (and deducts depreciation expense against the basis of the property)and as a personal residence, the taxpayer will not be allowed to exclude the entire amount of gain even if the taxpayer otherwise meets the ownership and use tests and the amount of the gain is less than the limit on excludable gain.
C)If a taxpayer converts a rental home to a principal residence, the taxpayer's basis in the principal residence is the greater of the basis of the home at the time of the conversion or the fair market value at the time of the conversion.
D)None of the choices are correct.

Question 54

On November 1, year 1, Jamie (who is single)purchased and moved into her principal residence. In the early part of year 2, Jamie was laid off from her job. On February 1, year 2, Jamie sold the home at a $57,500 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in year 2?

A)$0.
B)$5,750.
C)$31,250.
D)$57,500.

Question 55

Ethan (single)purchased his home on July 1, 2010. He lived in the home as his principal residence until July 1, 2017, when he moved out of the home, and rented it out until July 1, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his gross income?

A)$0.
B)$168,000.
C)$200,000.
D)$210,000.

Question 56

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. What is the maximum amount of gain that Larry and Darlene may exclude?

A)$0.
B)$250,000.
C)$500,000.
D)$600,000.

Question 57

Ethan (single)purchased his home on July 1, 2010. He lived in the home as his principal residence until July 1, 2017, when he moved out of the home, and rented it out until July 1, 2019, when he moved back into the home. On July 1, 2020, he sold the home and realized a $223,000 gain. What amount of the gain is Ethan allowed to exclude from his gross income?

A)$0.
B)$178,400.
C)$213,000.
D)$223,000.

Question 58

On February 1, 2020, 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 2020 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?

A)Under no circumstance will Stephen be allowed to exclude gain on home 2 if he sells home 2 in 2021.
B)Stephen will be eligible to exclude gain on home 2 only if he waits until 2025 to sell it.
C)In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2020.
D)None of the choices are correct.

Question 59

Dawn (single)purchased her home on July 1, 2009. On July 1, 2019, Dawn moved out of the home. She rented out the home until July 1, 2020, when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2020 gross income?

A)$0.
B)$23,000.
C)$207,000.
D)$230,000.

Question 60

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

Question 61

On July 1 of year 1, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year. (Elaine was liable for the taxes because she owned the property when they became due.)What amount of real property taxes is Elaine allowed to deduct for year 1? (Assume not married filing separately.)

A)$0.
B)$4,000.
C)$4,500.
D)$5,000.
E)$9,000.

Question 62

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

A)The limit on acquisition indebtedness depends on filing status.
B)The limit on acquisition indebtedness applies to one (not multiple)loans.
C)The limit on acquisition indebtedness applies only in the year of acquisition.
D)Taxpayers who do not itemize deductions can still deduct home mortgage interest as a from AGI deduction.

Question 63

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?

A)All else equal, the break-even point for paying points on an original mortgage is longer than the break-even point for paying points on a refinance.
B)All else equal, the break-even point for paying points on an original mortgage is longer for a taxpayer who does not make extra principal payments each year on the loan than for a taxpayer who does make additional principal payments each year on the loan.
C)All else equal, the break-even point for a taxpayer paying points on an original mortgage is longer when the taxpayer's marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed.
D)None of the choices are correct.

Question 64

Amanda purchased a home for $1,000,000 in 2016. She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in year 2022, when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing, paid off the first mortgage, and used the remainder for purposes unrelated to the home. What is her total amount of acquisition indebtedness forthe purposes of determining the deduction for home mortgage interest? (Assume not married filing separately.)

A)$600,000.
B)$750,000.
C)$1,000,000.
D)$1,100,000.

Question 65

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

A)The owner of the property at the time the property taxes are due is responsible for paying all of the real property taxes on the property for the year. Consequently, this person is allowed to deduct all of the property taxes for the year.
B)Taxpayers are allowed to deduct the real property taxes they actually pay for the year.
C)Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property.
D)None of the choices are correct.

Question 66

On July 1 of year 1, Elaine purchased a new home for $795,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $15,900 ($795,000 × 2%). On the settlement statement, Elaine was charged $7,950 for the year in property taxes and the seller was charged $7,950. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $16,900. Elaine wrote a $16,900 check to the local government to pay the taxes for that calendar year. (Elaine was liable for the taxes because she owned the property when they became due.)What amount of real property taxes is Elaine allowed to deduct for year 1? (Assume not married filing separately.)

A)$8,450.
B)$0.
C)$8,950.
D)$7,950.
E)$16,900.

Question 67

On March 31, year 1, Mary borrowed $200,000 to buy 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. What is Mary's year 1 deduction for her points paid?

A)$50.
B)$150.
C)$4,500.
D)$6,000.

Question 68

Jessica purchased a home on January 1, 2020, for $720,000 by making a down payment of $290,000 and financing the remaining $430,000 with a loan, secured by the residence, at 6 percent. During 2020 and 2021, Jessica made interest-only payments on this loan of $25,800 (each year). On July 1, 2020, when her home was worth $720,000, Jessica borrowed an additional $180,000 secured by the home at an interest rate of 8 percent. During 2020, she made interest-only payments on the second loan in the amount of $7,200. During 2021, she made interest-onlypayments on the second loan in the amount of $14,400. What is the maximum amount of the $40,200 interest expense Jessica paid during 2021 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

A)$0.
B)$14,400.
C)$37,835.
D)$8,400.
E)$40,200.

Question 69

Which of the following statements regarding deductions for real property taxes is correct?

A)Real property taxes paid on an individual's personal residence are deductible as for AGI deduction.
B)Taxpayers may deduct as an itemized deduction up to $10,000 (unless married filing separately)all taxes combined (including either state, local, and foreign income taxes or state and local sales taxes, as well as state and local real property taxes).
C)Taxpayers are not allowed to deduct real property taxes.
D)None of the choices are correct.

Question 70

Amanda purchased a home for $460,000 in 2016. She paid $92,000 cash and borrowed the remaining $368,000. This is Amanda's only residence. Assume that in year 2022, when the home had appreciated to $690,000 and the remaining mortgage was $276,000, interest rates declined and Amanda refinanced her home. She borrowed $460,000 at the time of the refinancing, paid off the first mortgage, and used the remainder for purposes unrelated to the home. What is her total amount of acquisition indebtedness forthe purposes of determining the deduction for home mortgage interest? (Assume not married filing separately.)

A)$276,000.
B)$345,000.
C)$460,000.
D)$506,000.

Question 71

On April 1, year 1, 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 year 1 for her points paid?

A)$150.
B)$200.
C)$4,500.
D)$6,000.

Question 72

On March 31, year 1, Mary borrowed $200,000 to buy her principal residence. Mary paid 1 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's year 1 deduction for her points paid?

A)$17.
B)$50.
C)$1,500.
D)$2,000.

Question 73

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?

A)Points paid in the form of a loan origination fee on an original home loan are deductible over the life of the loan.
B)Points paid in the form of prepaid interest on an original home loan are deductible over the life of the loan.
C)Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.
D)None of the choices are correct.

Question 74

Patricia purchased a home on January 1, 2017, for $1,200,000 by making a down payment of $100,000 and financing the remaining $1,100,000 with a loan, secured by the residence, at 6 percent. From 2017 through 2020, Patricia made interest-only payments on the loaneach year in the amount of $66,000. What amount of the $66,000 interest expensethat Patricia paid during 2020 may she deduct as an itemized deduction? (Assume not married filing separately.)

A)$0.
B)$6,000.
C)$60,000.
D)$66,000.

Question 75

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

A)Taxpayers may deduct all of the interest paid on up to $1,000,000 of acquisition debt if the debt occurred in January of 2017.
B)Taxpayers may deduct all of the interest paid on up to $750,000 of acquisition debt if the debt occurred in January of 2018.
C)If, in 2020, a taxpayer refinances acquisition debt that was originally incurred in January of 2017, the taxpayer may deduct the interest on up to only $750,000 of the refinanced loan.
D)None of the choices is false.

Question 76

On April 1, year 1, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 1 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 year 1 for her points paid?

A)$50.0.
B)$67.0.
C)$1,500.
D)$2,000.

Question 77

Which of the following statements regarding deductions for real property taxes is incorrect?

A)A taxpayer is allowed to immediately deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.
B)Taxpayers are not allowed to deduct payments made for setting up water and sewer services.
C)An individual deducts real property taxes on her principal residence as a from AGI deduction.
D)Taxpayers are not allowed to deduct payments made for repairs to neighborhood sidewalks.

Question 78

Patricia purchased a home on January 1, 2017, for $1,260,000 by making a down payment of $100,000 and financing the remaining $1,160,000 with a loan, secured by the residence, at 6 percent. From 2017 through 2020, Patricia made interest-only payments on the loaneach year in the amount of $69,600. What amount of the $69,600 interest expensethat Patricia paid during 2020 may she deduct as an itemized deduction? (Assume not married filing separately.)

A)$0.
B)$9,600.
C)$60,000.
D)$69,600.

Question 79

Jessica purchased a home on January 1, 2020, for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. During 2020 and 2021, Jessica made interest-only payments on this loan of $18,000 (each year). On July 1, 2020, 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 2020, she made interest-only payments on the second loan in the amount of $5,000. During 2021, she made interest-only payments on the second loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2021 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

A)$0.
B)$10,000.
C)$26,353.
D)$26,000.
E)$28,000.

Question 80

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. On January 1, year 4, when her home was worth $300,000, Abby refinanced the home by taking 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)$2,000.
C)$5,000.
D)$6,000.