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.. A taxpayer who
Trang 1Chapter 14 Tax Consequences of Home Ownership
True / False Questions
1 In general terms, the tax laws favor taxpayers who own a principal residence relative
to those who rent a principal residence
Trang 29 The ownership test for excluding gain on the sale of a principal residence requires thetaxpayer to have owned the property for three or more years during the five year period ending on the date of sale
True False
10 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
True False
11 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
True False
12 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
True False
13 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
True False
16 At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances
True False
Trang 318 The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may deduct in a particular year
True False
19 A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home
True False
20 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
True False
21 For regular tax purposes, a taxpayer may deduct interest expense on qualifying homeequity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home
True False
22 Taxpayers with high AGI are not allowed to deduct interest on qualifying home equity indebtedness
True False
23 Depending on AGI, taxpayers may be able to deduct mortgage insurance premiums
as a for AGI deduction
True False
24 When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest
True False
25 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 True False
Trang 427 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
True False
28 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
True False
29 Taxpayers who purchased a home in 2008 and received the first-time home buyer taxcredit must (with a few limited exceptions) pay the credit back to the government in subsequent years
True False
32 When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is based on the number of rental days over rental days plus personal use days
35 Taxpayers renting a home would generally report the rental income and expenses on Schedule E
Trang 537 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
True False
38 A tax loss from a rental home is a passive activity loss
True False
39 A self-employed taxpayer reports home office expenses as for AGI deductions while
employees report home office expenses as from AGI deductions
True False
40 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
True False
41 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)
True False
42 Taxpayers using the simplified method for computing home office expenses do not
deduct depreciation expense for the home office use
True False
Multiple Choice Questions
43 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?
Trang 644 In order to be eligible to exclude gain on the sale of a principal residence, the
taxpayer must meet which of the following tests?
45 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?
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
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
47 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
48 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 How much of the gain may
Shantel and Daron exclude?
Trang 749 On February 1, 2014 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 2014 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 2015
B Stephen will be eligible to exclude gain on home 2 only if he waits until 2019 to sell it
C In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2014
50 On November 1, 2014, Jamie (who is single) purchased and moved into her principal
residence In early 2015, Jamie was laid off from her job On February 1, 2015, 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
51 Cameron (single) purchased and moved into his principal residence on July 1, 2014
On June 1, 2015, Cameron lost his job Because he couldn't afford the payments on
his new home, he sold it on July 1, 2015 in order to move into some apartments
across the street On the sale of his principal residence, Cameron realized a $50,000
gain How much of the gain is Cameron allowed to exclude from his 2015 gross
52 Dawn (single) purchased her home on July 1, 2005 On July 1, 2013 Dawn moved out
of the home She rented out the home until July 1, 2014 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 2014 gross income?
Trang 853 Michael (single) purchased his home on July 1, 2004 On July 1, 2012 he moved out of
the home He rented out the home until July 1, 2013 when he moved back into the
home On July 1, 2014 he sold the home and realized a $300,000 gain What amount
of the gain is Michael allowed to exclude from his 2014 gross income?
A
B
C
D
54 Ethan (single) purchased his home on July 1, 2005 On July 1, 2012 he moved out of
the home He rented the home until July 1, 2014 when he moved back into the home
On July 1, 2015 he sold the home and realized a $210,000 gain What amount of the
gain is Ethan allowed to exclude from his 2015 gross income?
A
B
C
D
55 What is the maximum amount of gain on the sale of principal residence a married
couple may exclude from gross income?
A
B
C
D
56 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
57 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:
Trang 958 Which of the following best describes a qualified residence for purposes of
determining a taxpayer's deductible home mortgage interest expense?
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)
59 Which of the following statements regarding interest expense on home-related debt
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 Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited amount of home equity indebtedness
60 Patrick purchased a home on January 1, 2014 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 2014 Patrick made interest-only
payments on the loan of $30,000 On July 1, 2014, when his home was worth
$600,000 Patrick borrowed an additional $75,000 secured by the home at an interest
rate of 8 percent During 2014, he made interest-only payments on this loan in the
amount of $3,000 What amount of the $33,000 interest expense Patrick paid during
2014 may he deduct as an itemized deduction?
A
B
C
D
61 Patricia purchased a home on January 1, 2014 for $1,200,000 by making a down
payment of $100,000 and financing the remaining $1,100,000 with a 30-year loan,
secured by the residence, at 6 percent During 2014, Patricia made interest-only
payments on the loan of $66,000 What amount of the $66,000 interest expense
Patricia paid during 2014 may she deduct as an itemized deduction?
A
B
Trang 1062 Lauren purchased a home on January 1, 2014 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 During 2014, Lauren made interest-only payments on the
loan On July 1, 2014, when her home was valued at $500,000, she borrowed an
additional $150,000, secured by the residence During 2014, she made interest-only
payments on the second loan Which of the following statements regarding the
deductibility of the interest Lauren paid is correct (assume she uses the chronological
order of the loans to determine deductible interest expense if a limitation applies)?
A Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan unless she uses the loan proceeds to substantially improve the home
B Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan no matter what she does with the proceeds of the second loan
C Lauren may deduct all of the interest on the first loan or all of the interest on the second loan
D Lauren may deduct all of the interest on the first loan and all of the interest on the second loan no matter what she does with the loan proceeds
63 Kimberly 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 Kimberly made
interest-only payments on the loan in the amount of $18,000 each year On July 1,
2013, when her home was worth $500,000, Kimberly 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 and during 2014,
she made interest only payments on the loan in the amount of $10,000 What is the
maximum amount of the $28,000 interest expense Kimberly paid during 2014 that
she may deduct as an itemized deduction, if she used the proceeds of the second
loan to pay off student loans from law school?
64 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
Trang 1165 In 2012, 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, at 6 percent In 2014, Jaspreet made interest only payments of $6,000 on the $100,000 loan On January 1, 2014, when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home) The first was for $80,000 at an interest rate of 9 percent The second home equity loan from a different bank was for $40,000 at an interest rate of 7 percent In 2014, 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 the home-equity loans for purposes unrelated to the home What is the maximum amount of interest expense Jaspreet can deduct on these loans as home related interest expense?
A
B
C
D
66 In 2012, Gabby purchased a new home 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 In 2014, Gabby made interest-only payments of $18,000 on the $300,000 loan On January 1, 2014, Gabby executed two home equity loans (bothsecured by the home) The first was for $80,000 at an interest rate of 7 percent The second home equity loan from a different bank was for $40,000 at an interest rate of
9 percent In 2014, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second Gabby used the loan proceeds for purposes unrelated to the home What is the maximum amount of interest expense Gabby can deduct on these loans as home related interest expense?
A
B
C
D
67 In 2011, 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, 2014, the outstanding balance on the loan was
$40,000 On January 1, 2014, 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 2014, she made interest-only payments on the new loan of $6,000 What amount of the $6,000 interest expense on
Trang 1268 In 2011, Kris 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, 2014, the outstanding balance on the loan was
$40,000 On January 1, 2014, when his home was worth $300,000, Kris refinanced
the home by taking out a $150,000 mortgage at 5 percent With the loan proceeds,
he paid off the $40,000 balance of the existing mortgage and used the remainder for
purposes unrelated to the home During 2014, he made interest only payments on
the new loan of $7,500 What amount of the $7,500 interest expense on the new loan
can Kris deduct in 2014 on the new mortgage as home related interest expense?
A The limit on qualified home equity indebtedness depends on filing status
B Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan
C If the value of a home drops, the amount of qualified home equity indebtedness on an existing home equity loan also drops
D In order to deduct interest on home equity indebtedness, taxpayers must use the proceeds of a home equity loan to improve the home
70 Amanda purchased a home for $1,000,000 in 2003 She paid $200,000 cash and
borrowed the remaining $800,000 This is Amanda's only residence Assume that in
2014 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 What is her total amount of
qualifying home-related debt for tax purposes?
A
B
C
D
71 On March 31, 2014, 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 2014 deduction for her points paid?
A
Trang 1372 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
73 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
74 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?
A A taxpayer is not allowed to 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 for AGI deduction
D Taxpayers are not allowed to deduct payments made for neighborhood sidewalks
76 Which of the following statements best describes the deductibility of real property
taxes when a taxpayer sells real property during a year?
Trang 1477 On July 1 of 2014, 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, 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 2014?
A Taxpayers who acquired a home in 2008 and claimed the credit is not required to pay the credit back
B Taxpayers who acquired a home in 2008 and claimed the credit are required to pay the credit back over a 15-year period
C Taxpayers who acquired a home in 2008 and claimed the credit are required to pay it back over a 15-year period
D
79 Which of the following statements regarding personal and/or rental use of a home is
false?
A A day for which a taxpayer rents a home to an unrelated party for less than the property's fair market value is considered to be a personal use day
B A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day
C A day for which an unrelated non-owner stays in the home under a vacation exchange arrangement is considered to be a personal use day
D A day for which the home is available for rent but is not occupied does not count as a personal use or a rental use day
80 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
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?
A Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI
Trang 1581 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?
A Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI
B Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home
C Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy's deductible expenses for 2014 may not exceed the amount of her rental receipts (she may not report a loss from the rental property)
82 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 The Tax Court approach allocates more property tax and interest expense to rental use than does the IRS approach
B The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use
C The IRS approach allocates interest expense and property taxes to rental use based on the ratio of the number of days of rental use to the total days of the year
83 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?
A $0 net income $1,000 depreciation expense carried forward to next year
B ($1,000) net loss $0 expenses carried over to next year
C $0 net income $1,000 of other expense carried over to next year
D $0 net income $1,000 of interest expense and property taxes carried over to next year
84 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)?
Trang 1685 Harriet owns a second home that she rents to others During the year, she used the
second home for 10 personal days and for 200 rental days Which of the following
statements regarding the manner in which she should account for her income and/or
expenses associated with the home is incorrect?
A Harriet's deductible expenses are not limited to the amount of gross rental income from the property
B Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property
C Harriet is required to include all of the rental receipts in gross income
D Harriet is required to allocate all expenses associated with the home to rental use or personal use
86 For a home to be considered a rental (nonresidence) property, a taxpayer must
A Rent the property for 15 days or more during the year
B Use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented
C Use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented
D Rent the property for 15 days or more during the year and use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented
E Rent the property for 15 days or more during the year and use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented
87 When a taxpayer experiences a net loss from a nonresidence (rental property):
A The taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources
B The loss is fully deductible against the taxpayer's ordinary income no matter the circumstances
C If the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does not have any sources of passive income.
D If the taxpayer is not allowed to deduct the loss due to the passive activity loss limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property
88 Harvey rents his second home During 2014, 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 in 2014?
A
B
C
D
89 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?
Trang 1790 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 Depreciation expense, other expenses, property taxes and interest expense
B Other expenses, depreciation expense, property taxes and interest expense
C Property taxes and interest expense, depreciation expense, other expenses
D Other expenses, property taxes and interest expense, depreciation expense
91 Which of the following statements regarding limitations on the deductibility of home
office expenses of employees is correct?
A Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor
B Deductible home office expenses of employees are miscellaneous itemized deductions not subject to the 2 percent floor
C Deductible home office expenses of employees are for AGI deductions limited to gross income from the business
D Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business
92 Which of the following statements regarding limitations on the deductibility of home
office expenses of self-employed taxpayers is correct?
A Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor
B Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor
C Deductible home office expenses are for AGI deductions limited to gross income from the business minus non home office related expenses
D Deductible home office expenses are for AGI deductions and may be deducted without limitation
93 Which of the following statements regarding the home office expense deduction is
correct?
A The amount of home office expense allowed under the simplified method of computing home office expenses is limited to a fixed amount no matter how much the income from the business and no matter how big the home office
B Taxpayers may choose to use the actual expense method for determining home office expenses in one year and choose the simplified method in a different year
C Under the simplified method of computing home office expenses, a taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense
Trang 1894 Alison Jacobs (single) purchased a home in Las Vegas, Nevada for $400,000 She moved into the home on September 1, year 0 She lived in the home as her primary residence until July 1 of year 4 when she sold the home for $675,000 If Alison's marginal ordinary tax rate is 25% what amount of tax will Alison pay on the $275,000gain?
95 Nelson Whiting (single) purchased a home in Denver, Colorado for $300,000 He moved into the home on July 1 of year 1 He lived in the home as his primary
residence until December 1, year 2 when he sold the home for $450,000 Nelson soldthe home because he was changing jobs and his new job was in a different state What amount of gain must Nelson recognize on the home sale in year 2?
96 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?
Trang 1997 Darren (single) purchased a home on January 1, 2010 for $400,000 Darren lived in the home as his primary residence until January 1, 2012 when he began using the home as a vacation home He used the home as a vacation home until January 1
2013 (he used a different home as his primary residence from January 1, 2012 to January 1, 2013) On January 1, 2013, Darren moved back into the home and used it
as his primary residence until January 1, 2014 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 2014?
98 Heidi (single) purchased a home on January 1, 2005 for $400,000 She lived in the home as her primary residence until January 1, 2012 when she began using the home
as a vacation home She used the home as a vacation home until January 1, 2013 (she used a different home as her primary residence from January 1, 2012 to January
1, 2013) On January 1, 2013, Heidi moved back into the home and used it as her primary residence until January 1, 2014 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 2014?
Trang 2099 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?
100
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 Sandrapaid $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?
Trang 21
Lebron Taylor purchased a home on July 1, 2013 for $500,000 Lebron paid for the entire purchase price with cash In July of 2013, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000 During 2014, he made interest only payments of $4,500 on the loan What amount ofthe $4,500 interest expense can Lebron deduct in 2014?
102
Leticia purchased a home on July 1, 2010 for $200,000 She paid $180,000 down andfinanced the remaining $20,000 On January 1, 2012 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 2014, Leticia made interest-only payments of $15,000
on the loan What amount of the $15,000 interest expense is Leticia allowed to deduct?
Trang 22
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 one discount 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 deductionsirrespective of any interest expense he may pay Jasper's marginal ordinary income tax rate is 28 percent What is Jasper's break-even point in years (for simplicity, ignore time value of money concerns)?
Trang 23
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 25 percent What is Amelia's break-even point inyears (for simplicity, ignore time value of money concerns)?
Trang 24
Joshua and Mary Sullivan purchased a new home on October 1 of year 1 for
$400,000 At the time of the purchase, it was estimated that the real property tax rate for the year would be 1 percent of the property's value Because the taxing jurisdiction collects taxes on a July 1 year-end, it was estimated that the Sullivans would be required to pay $3,000 in property taxes for the property tax year relating
to October through June of year 2 ($400,000 × 1% × 9/12) The seller would be required to pay the $1,000 for July through September of year 1 Along with their monthly payment of principal and interest, the Sullivans paid $333 a month to the mortgage company to cover the property taxes The mortgage company placed the money in escrow and used the funds in the escrow account to pay the property tax bill in July of year 2 The Sullivans' itemized deductions exceed the standard
deduction before considering property taxes What amount are the Sullivans allowed
to deduct for property taxes relating to the property in year 1 (ending July 1, year 1) and year 2 (ending July 1, year 2)?
Trang 25
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?
Trang 26
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 rental use of the property What is Tyson's
net rental income for the year?
Trang 27
Rayleen owns a condominium near Orlando, Florida This year, she incurs the
following expenses in connection with her condo:
During the year, Rayleen rented the condo for 130 days and she received $25,000 of rental receipts She did not use the condo at all for personal purposes during the year Rayleen is considered to be an active participant in the property Rayleen's AGI from all sources other than the rental property is $130,000 Rayleen does not have passive income from any other sources What is Rayleen's AGI?
Trang 29
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?
Trang 30
Alfredo is self-employed and he uses a room in his home as his principal place of business He meets clients there and doesn't use the room for any other purpose The size of his home office is 600 square feet The size of his entire home is 3,000 square feet During the current year, Alfredo received $10,000 of gross income from his business activities and he reports $7,500 of business expenses unrelated to his home office For his entire home, he reported $10,000 of mortgage interest, $2,000
of property taxes, $2,500 of home operating expenses, and $4,500 of depreciation expense What amount of home office expenses is Alfredo allowed to deduct in the current year (assume he uses the actual expense method of computing home office expenses)? Indicate the amount and type of expenses he must carry over to next year, if any
Trang 31Chapter 14 Tax Consequences of Home Ownership Answer Key
True / False Questions
1 In general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-01 Determine whether a home is considered a principal residence; a residence (not
principal); or a nonresidence for tax purposes.
Level of Difficulty: 1 Easy Topic: Personal use of the home
2 Renting a residence may have nontax advantages over owning a home
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-01 Determine whether a home is considered a principal residence; a residence (not
principal); or a nonresidence for tax purposes.
Level of Difficulty: 1 Easy Topic: Personal use of the home
3 A personal residence is not a capital asset
FALSE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
4 A taxpayer may be required to pay tax on a gain the taxpayer realizes when she
Trang 325 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
FALSE
The number of days to determine residence status is fourteen days
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-01 Determine whether a home is considered a principal residence; a residence (not
principal); or a nonresidence for tax purposes.
Level of Difficulty: 2 Medium Topic: Personal use of the home
6 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
Blooms: Analyze Learning Objective: 14-01 Determine whether a home is considered a principal residence; a residence (not
principal); or a nonresidence for tax purposes.
Level of Difficulty: 2 Medium Topic: Personal use of the home
7 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
Trang 338 Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
9 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
FALSE
The taxpayer must have owned the property for two or more years
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
10 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
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
11 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
Trang 3412 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
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Apply Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
13 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
FALSE
One spouse must meet the ownership test and both must meet the use test
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 2 Medium Topic: Exclusion of gain on sale of personal residence
14 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
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
15 A taxpayer who sells a principal residence that has been used (or is being used) as
a rental property 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
Trang 3516 At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances
FALSE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 1 Easy Topic: Exclusion of gain on sale of personal residence
17 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
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Apply Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements
for excluding gain on the sale Level of Difficulty: 2 Medium Topic: Exclusion of gain on sale of personal residence
18 The tax laws place a fixed dollar limit on the amount of qualified residence interest
a taxpayer may deduct in a particular year
Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 2 Medium Topic: Interest expense on home-related debt
19 A taxpayer who rents out a home for at least one day and does not use a home for
Trang 3620 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
TRUE
The maximum amount of debt on which a taxpayer may deduct qualified residenceinterest is $1,100,000; $1,000,000 of acquisition indebtedness plus $100,000 of home-equity indebtedness
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 2 Medium Topic: Interest expense on home-related debt
21 For regular tax purposes, a taxpayer may deduct interest expense on qualifying home equity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 2 Medium Topic: Interest expense on home-related debt
22 Taxpayers with high AGI are not allowed to deduct interest on qualifying home equity indebtedness
FALSE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 1 Easy Topic: Interest expense on home-related debt
Trang 37Topic: Interest expense on home-related debt
24 When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest
FALSE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 1 Easy Topic: Interest expense on home-related debt
25 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
FALSE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 1 Easy Topic: Interest expense on home-related debt
26 The longer a taxpayer plans on living in a home without refinancing, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by
a residence Level of Difficulty: 1 Easy Topic: Interest expense on home-related debt
27 A taxpayer who purchases real property during the year is allowed to deduct the
Trang 38Blooms: Remember Learning Objective: 14-04 Discuss the deductibility of real property taxes and describe the first-time home
buyer credit tax consequences Level of Difficulty: 2 Medium Topic: Real property taxes
28 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
FALSE
The deduction timing is based on when the actual taxes are paid to the taxing jurisdiction, not when the homeowner makes payments for taxes to the escrow account
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-04 Discuss the deductibility of real property taxes and describe the first-time home
buyer credit tax consequences Level of Difficulty: 1 Easy Topic: Real property taxes
29 Taxpayers who purchased a home in 2008 and received the first-time home buyer tax credit must (with a few limited exceptions) pay the credit back to the
government in subsequent years
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-04 Discuss the deductibility of real property taxes and describe the first-time home
buyer credit tax consequences Level of Difficulty: 1 Easy Topic: Real property taxes
30 In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
Trang 39AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
including determining the deductibility of residential rental real estate losses.
Level of Difficulty: 1 Easy Topic: Rental use of home
32 When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is based on the number of rental days over rental days plus personal use days
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
including determining the deductibility of residential rental real estate losses.
Level of Difficulty: 2 Medium Topic: Rental use of home
33 Expenses of a vacation home allocated to rental use are deductible for AGI
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
including determining the deductibility of residential rental real estate losses.
Level of Difficulty: 1 Easy Topic: Rental use of home
34 In terms of allocating expenses between rental use and personal use, the IRS method tends to allocate more expenses to personal use than does the Tax Court method
FALSE
The IRS Method uses the total personal and rental days as the denominator
whereas the tax court method uses the entire year The tax court method results in
a small percentage allocated to rental days and larger percentage allocated to personal use
AACSB: Reflective Thinking
Trang 4035 Taxpayers renting a home would generally report the rental income and expenses
on Schedule E
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
including determining the deductibility of residential rental real estate losses.
Level of Difficulty: 1 Easy Topic: Rental use of home
36 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
FALSE
The home is considered a nonresidence When property is used for even a day for personal purposes, the expenses must be allocated between the rental usage and personal usage
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
including determining the deductibility of residential rental real estate losses.
Level of Difficulty: 2 Medium Topic: Rental use of home
37 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
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home;
including determining the deductibility of residential rental real estate losses.
Level of Difficulty: 2 Medium Topic: Rental use of home
38 A tax loss from a rental home is a passive activity loss