Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap014

Chapter 14 Tax Consequences of Home Ownership True / False Questions In general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence True False Renting a residence may have nontax advantages over owning a home True False A personal residence is not a capital asset True False A taxpayer may be required to pay tax on a gain the taxpayer realizes when she sells her principal residence True False 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 True False 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 True False 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 True False Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence True False 14-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 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 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 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 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 False 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 gain realized on the sale is lower than the maximum exclusion amount 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 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 False 14-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 18 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 home equity 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 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 False 14-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 27 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 tax credit must (with a few limited exceptions) pay the credit back to the government in subsequent years True False 30 In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income True False 31 Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and to the rental use 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 True False 33 Expenses of a vacation home allocated to rental use are deductible for AGI True False 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 True False 35 Taxpayers renting a home would generally report the rental income and expenses on Schedule E True False 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 True False 14-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 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 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 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? A B C D E Ordinary income/gain Short-term capital gain Long-term capital gain 14-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 44 In order to be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet which of the following tests? A B C D E 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 B C D A taxpayer may have more than one principal residence at any one time A taxpayer's principal residence may not be a houseboat A taxpayer with more than one residence may annually elect which residence is c None of these statements is true 46 Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct? A B C D A taxpayer may not exclude gain if the taxpayer is renting the residence at the tim A taxpayer may simultaneously own two homes that are eligible for the home sale A taxpayer must be living in a residence at the time it is sold to qualify for the e For a married couple to qualify for the $500,000 exclusion, both spouses must me 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 Darlene exclude? A B C D 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? A B C D 14-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 49 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 on the same day Assuming Stephen lives in home as his principal residence until he sells it, which of the following statements is true? A B C D Under no circumstance will Stephen be allowed to exclude gain on home if he se Stephen will be eligible to exclude gain on home only if he waits until 2019 to In certain circumstances, Stephen may be able to exclude gain on home even if None of these is a true statement 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 income in 2015? A B C D 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 income? A B C D 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? A B C D 14-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 53 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 B C D If a taxpayer converts a home from personal use to rental use, the basis of the ren If a taxpayer uses a residence as a rental property (and deducts depreciation expe If a taxpayer converts a rental home to a principal residence, the taxpayer's basis None of these statements is correct 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: A B C D Personal use of the home exceeds the taxpayer's rental use of the home Personal use of the home exceeds half of the taxpayer's rental use of the home Personal use of the home exceeds the lesser of 14 days or 10 percent of the taxp Personal use of the home exceeds the greater of 14 days or 10 percent of the tax 14-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 58 Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense? A B C D Only the taxpayer's principal residence The taxpayer's principal residence and two other residences (chosen by the taxp The taxpayer's principal residence and one other residence (chosen by the taxp Any two residences chosen by the taxpayer 59 Which of the following statements regarding interest expense on home-related debt is correct? A B C D Taxpayers may deduct interest expense on a limited amount of home equity indeb Taxpayers may deduct interest expense on a limited amount of acquisition indebte Taxpayers may deduct interest expense on a limited amount of acquisition indebt None of these statements is correct 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 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 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 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 C D 14-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 62 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 B C D Lauren may deduct all of the interest on the first loan but she may deduct only two Lauren may deduct all of the interest on the first loan but she may deduct only two Lauren may deduct all of the interest on the first loan or all of the interest on the Lauren may deduct all of the interest on the first loan and all of the interest on th 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 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 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? A B C D E 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 percent During 2013 and 2014, Jessica made interestonly 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 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 B C D E 14-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 99 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? 30 days personal; 51 days rental Feedback: Personal (14 + + + 3), Rental (6 + 42 + 3) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-01 Determine whether a home is considered a principal residence; a residence (not principal); or a nonresidence for tax purposes Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense deductions Topic: Personal use of the home 100 Rafael and Sandra Gonzalez purchased a home on January of year for $400,000 by paying $40,000 down and borrowing the remaining $360,000 with a 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 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? $25,455 Feedback: $28,000 × 400,000/440,000 Average method generates more income because the second loan has a higher rate than the first loan Note that only $40,000 of the second loan is qualifying debt because this is the portion secured by the equity in the home (the total qualifying debt is limited to the fair market value of the property) AACSB: Reflective Thinking 14-235 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense on home-related debt 101 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 of the $4,500 interest expense can Lebron deduct in 2014? $3,000 Feedback: $4,500 × 100,000/150,000 All debt is home equity debt There is no acquisition indebtedness AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense on home-related debt 102 Leticia purchased a home on July 1, 2010 for $200,000 She paid $180,000 down and financed 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? $11,250 Feedback: $15,000 × [(100,000 + 50,000)/200,000] AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense on home-related debt 14-236 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 103 Robin purchased a home on July 1, 2009 for $300,000 She paid $200,000 down and financed the remaining $100,000 On January 1, 2014 when the outstanding balance of her mortgage was $85,000 and her home was valued at $300,000, she refinanced her home for $250,000 With the $250,000 loan, she paid off the remaining $85,000 balance of her original mortgage, she used $70,000 to substantially improve her home and she used the remaining $95,000 for purposes unrelated to her home During 2014, Robin made interest only payments of $12,500 on the loan What amount of the $12,500 interest expense is Robin allowed to deduct in 2014? $12,500 Feedback: All debt is qualifying debt The loan used to improve her home increases acquisition indebtedness AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense on home-related debt 14-237 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 104 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 deductions irrespective 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)? One year Feedback: See computation below AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense on home-related debt 14-238 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 105 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 percent or (2) paying two discount points on the loan and paying interest of 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 in years (for simplicity, ignore time value of money concerns)? 2.61 years Feedback: See computation below AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence Level of Difficulty: Medium Topic: Interest expense on home-related debt 14-239 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 106 Jason and Alicia Johnston purchased a home in Austin, Texas for $500,000 They moved into the home on September 1, year They lived in the home as their primary residence until July of year when they sold the home for $800,000 What amount of the $300,000 gain are they allowed to exclude? $300,000 Feedback: They qualify to exclude up to $500,000 of gain AACSB: Reflective Thinking AICPA: BB Critical Thinking 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: Easy Topic: Exclusion of gain on sale of home 107 Joshua and Mary Sullivan purchased a new home on October of year for $400,000 At the time of the purchase, it was estimated that the real property tax rate for the year would be percent of the property's value Because the taxing jurisdiction collects taxes on a July 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 ($400,000 × 1% × 9/12) The seller would be required to pay the $1,000 for July through September of year 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 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 (ending July 1, year 1) and year (ending July 1, year 2)? $0 in year 1; $3,000 in year Feedback: They did not live in the property during the tax year ending on July 1, year but they lived in the property for of the 12 months during the tax year ending on July 1, year They can deduct the taxes associated with these nine months when the taxes are paid in year AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-04 Discuss the deductibility of real property taxes and describe the first-time home buyer credit tax consequences Level of Difficulty: Medium Topic: Real property taxes 14-240 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 108 Kristen rented out her home for 10 days during the year for $5,000 She used the home for personal purposes for the other 355 days She allocated the following home expenses to the rental use of the home: Kristen's AGI is $120,000 before considering the effect of the rental activity What is Kristen's AGI after considering the tax effect of the rental use of her home? $120,000 Feedback: She ignores the income and the expenses AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply 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: Medium Topic: Rental use of home 14-241 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 109 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? $5,633 Feedback: See calculations below AACSB: Reflective Thinking 14-242 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education AICPA: BB Critical Thinking Blooms: Apply 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: Medium Topic: Rental use of home 14-243 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 110 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? $16,317 Feedback: See calculations below AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply 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 14-244 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Level of Difficulty: Medium Topic: Rental use of home 111 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? $132,550 Feedback: $130,000 + 2,550 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply 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: Easy Topic: Rental use of home 14-245 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 112 Ashton owns a condominium near San Diego, California This year, he incurs the following expenses in connection with his condo: During the year, Ashton rented the condo for 120 days and he received $24,000 of rental receipts He did not use the condo at all for personal purposes during the year Ashton is considered to be an active participant in the property Ashton's AGI from all sources other than the rental property is $120,000 Ashton does not have passive income from any other sources What is Ashton's AGI? $119,600 Feedback: $120,000 + (400) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply 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: Medium Topic: Rental use of home 14-246 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 113 Don owns a condominium near Orlando, California This year, he incurs the following expenses in connection with his condo: During the year, Don rented the condo for 70 days and he received $17,400 of rental receipts He did not use the condo at all for personal purposes during the year Don is considered to be an active participant in the property Don's AGI from all sources other than the rental property is $140,000 Don does not have passive income from any other sources What is Don's AGI? $135,000 Feedback: $140,000 + (5,000) Because Don is an active participant in the property, he is allowed to deduct ($5,000) of the passive loss this year [$25,000 active participant maximum less $25,000 × (140,000 - 100,000)/50,000] AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply 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: Medium Topic: Rental use of home 14-247 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 114 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? Under the actual expense method: $1,466, no carry over Feedback: See computation below Under the simplified method: $1,500 home office expense 300 qualifying square feet × $5 application rater = $1,500 home office expense This is less than gross income from the business minus expenses directly attributed to the business so the home office expense deduction is not limited by gross income If it was, the excess would not carry over to the next year AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-06 Describe the requirement necessary to qualify for home office deductions and compute the deduction limitations on home office deductions Level of Difficulty: Medium Topic: Business use of home 14-248 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 115 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 Alfredo is allowed to deduct $2,500 of home office expenses He must carryover $400 of home operating expenses and $900 of depreciation expense Feedback: See computation and discussion below Alfredo reports $2,500 of income before deducting home office expenses His expenses reduce his net business income to $0, but he must carryover $400 of home operating expenses and all $900 of depreciation expenses AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 14-06 Describe the requirement necessary to qualify for home office deductions and compute the deduction limitations on home office deductions Level of Difficulty: Medium Topic: Business use of home 14-249 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... the deductibility of home office expenses of employees is correct? A B C D Deductible home office expenses of employees are miscellaneous itemized deduct Deductible home office expenses of employees... residence and two other residences (chosen by the taxp The taxpayer's principal residence and one other residence (chosen by the taxp Any two residences chosen by the taxpayer 59 Which of the... home office expenses are for AGI deductions and may be deducted wi 93 Which of the following statements regarding the home office expense deduction is correct? A B C D The amount of home office