Deck 14: Tax Consequences of Home Ownership

Question 1

The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may deduct in a particular year.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

When determining the number of days a taxpayer has rented out a home during the year,any day when the home is available for rent but not actually rented out counts as a day of personal use.

Answer 3

False

Question 4

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

Question 5

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.

Question 6

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

Question 7

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.

Question 8

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.

Question 9

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.

Question 10

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

Question 11

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.

Question 12

In general terms, the tax laws favor taxpayers who own a principal residence relative tothose who rent a principal residence.

Question 13

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

Question 14

When determining the number of days a taxpayer has rented out a home during the year,any day when the home is available for rent but not actually rented out counts as a day of rental use.

Question 15

A taxpayer may be required to include in gross income gain the taxpayer realizes whenshe sells her principal residence.

Question 16

A personal residence is not a capital asset.

Question 17

A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.

Question 18

A taxpayer who sells a principal residence that has been used (or is being used) as a rental property since 2005 will not be allowed to exclude the portion of the gainattributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

Question 19

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

Question 20

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

Question 21

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.

Question 22

Taxpayers with high AGI are not allowed to deduct any interest on qualifying home equity indebtedness.

Question 23

Taxpayers with home offices who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible.

Question 24

A taxpayer who is financing his personal residence and who pays points on the loan in the form of prepaid interest generally must deduct the points over the life of the loan no matter whether the loan is an original loan or a refinance of an existing loan.

Question 25

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.

Question 26

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.

Question 27

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

Question 28

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.

Question 29

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

Question 30

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

Question 31

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

Question 32

The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

Question 33

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

Question 34

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

Question 35

In terms of allocating expenses between rental use and personal use, the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

Question 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.

Question 37

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

Question 38

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

Question 39

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 arelimited to net Schedule C income before home office expenses).

Question 40

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

Question 41

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) Short-term capital gain.
B) Long-term capital gain.
C) Personal gain.
D) Ordinary income/gain.
E) None of the choices are correct.

Question 42

Dawn (single) purchased her home on July 1, 2008. On July 1, 2016 Dawn moved out of the home. She rented out the home until July 1, 2017 when she sold the home andrealized 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 2017 gross income?

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

Question 43

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

Question 44

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

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

Question 45

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

A) 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.
B) 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.
C) If a taxpayer converts a rental home to a principal residence, the taxpayer's basis in the principal residence is the greater of the basis of the home at the time of the conversion or the fair market value at the time of the conversion.
D) None of these statements is correct.

Question 46

In order to be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet which of the following test(s)?

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

Question 47

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

Question 48

Michael (single) purchased his home on July 1, 2007. On July 1, 2015 he moved out of the home. He rented out the home until July 1, 2016 when he moved back into the home. On July 1, 2017 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2017 gross income?

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

Question 49

Lauren purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence. During year 1, Lauren made interest-only payments on the loan. On July 1, year 1, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During year 1, 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 exact method to determine deductible interestexpense if a limitation applies)?

A) 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.
B) Lauren may deduct all of the interest on the first loan or all of the interest on the second loan.
C) 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 in which case she would be able to deduct all of the interest.
D) 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.

Question 50

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

Question 51

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

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

Question 52

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 must be living in a residence at the time it is sold to qualify for the exclusion.
C) A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.
D) For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.

Question 53

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

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

Question 54

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

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

Question 55

On February 1, 2017 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 2017 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) In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2017.
B) Under no circumstance will Stephen be allowed to exclude gain on home 2 if he sells home 2 in 2018.
C) Stephen will be eligible to exclude gain on home 2 only if he waits until 2022 to sell it.
D) None of these is a true statement.

Question 56

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

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

Question 57

Patricia purchased a home on January 1, year 1 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 year 1, Patricia made interest-onlypayments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during year 1 may she deduct as an itemized deduction?

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

Question 58

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

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

Question 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 and a limited amount of home equity indebtedness.
C) Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.
D) None of these statements is correct.

Question 60

Patrick purchased a home on January 1, year 1 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 year 1, Patrick made interest-only payments on the loan of $30,000. On July 1, year 1, 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 year 1, 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 year 1 may he deduct as an itemized deduction?

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

Question 61

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 prepaid interest on a refinance 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 a loan origination fee on an original home loan are deductible over the life of the loan.
D) None of these statements is correct.

Question 62

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 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.
B) 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.
C) 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.
D) None of these statements is correct.

Question 63

Katy owns a second home. During the year, 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 andexpenses 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) Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy's deductible expenses for the year may not exceed the amount of her rental receipts (she may not report a loss from the rental property).
C) Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.
D) All of the above statements are correct.

Question 64

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

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) An individual deducts real property taxes on her principal residence as a for AGI deduction.
C) Taxpayers are not allowed to deduct payments made for setting up water and sewer services.
D) Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.

Question 65

Amanda purchased a home for $1,000,000 in year 1. She paid $200,000 cash andborrowed the remaining $800,000. This is Amanda's only residence. Assume that in year10 when the home had appreciated to $1,500,000 and the remaining mortgage was$600,000, interest rates declined and Amanda refinanced her home. She borrowed$1,000,000 at the time of the refinancing, paid off the first mortgage, and used theremainder for purposes unrelated to the home. What is her total amount of qualifying home-related debt for tax purposes?

A) $1,100,000.
B) $1,000,000.
C) $700,000.
D) $600,000.

Question 66

On July 1 of year 1, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be$8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, year 1 Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year (Elaine was liable for the taxes because she owned the property when they became due). What amount of real property taxes is Elaine allowed to deduct for year 1?

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

Question 67

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

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

Question 68

On March 31, year 1, Mary borrowed $200,000 to buy her principal residence. Mary paid3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's year 1 deduction for her points paid?

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

Question 69

On April 1, year 1, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. How much can Mary deduct in year 1 for her points paid?

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

Question 70

In year 1, 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, at6 percent. In year 3, Gabby made interest-only payments of $18,000 on the $300,000loan. On January 1, year 3, Gabby executed two home equity loans (both secured 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 (later in the day) was for $40,000 at an interest rate of 9 percent. In year 3, 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 candeduct on these loans as home related interest expense?

A) $25,905.
B) $25,400.
C) $18,000.
D) $27,200.

Question 71

Kimberly purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2 Kimberly made interest-onlypayments on this loan in the amount of $18,000 each year. On July 1, year 1, 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 year 1, she made interest-only payments on this loan in the amount of $5,000 and, during year 2, 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 ($18,000 + $10,000) that Kimberly paid during year 2 may she deduct as anitemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

A) $5,000.
B) $18,000.
C) $0.
D) $26,000.
E) $26,353.

Question 72

Which of the following statements regarding qualified home equity indebtedness is correct?

A) Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.
B) In order to deduct interest on home equity indebtedness, taxpayers must use the proceeds of a home equity loan to improve the home.
C) The limit on qualified home equity indebtedness depends on filing status.
D) If the value of a home drops, the amount of qualified home equity indebtedness on an existing home equity loan also drops.

Question 73

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 therental 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 interest expense and property taxes carried over to next year.
D) $0 net income. $1,000 of other expense carried over to next year.

Question 74

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

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

Question 75

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 the home is available for rent but is not occupied does not count as a personal use or a rental use day.
C) 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 (home is not the relative's principal residence).
D) 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.

Question 76

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

A) $14,545.
B) $16,000.
C) $14,600.
D) $6,000.

Question 77

In year 1, 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, year 4, the outstanding balance on the loan was $40,000. OnJanuary 1, year 4, when his home was worth $300,000, Kris refinanced the home bytaking 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 year 4, 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 year 4 on the new mortgage as home related interest expense?

A) $5,000.
B) $7,000.
C) $7,500.
D) $2,000.

Question 78

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 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.
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 Tax Court approach allocates more property tax and interest expense to rental use than does the IRS approach.
D) None of these statements is correct.

Question 79

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 direct 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 exclude the rental receipts from gross income and deduct the rental expenses for AGI.
B) Kenneth would include the rental receipts in gross income and would not deduct the rental expenses because he used the residence for personal purposes for most of the year.
C) Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.
D) Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI.

Question 80

Jessica purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2, Jessica made interest-only payments on this loan of $18,000 (each year). On July 1, year 1, when her home was worth $500,000Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During year 1, she made interest-only payments on the second loan in the amount of $5,000. During year 2, she made interest only on the second loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during year 2 may she deduct as an itemized deduction if she used theproceeds of the second loan to finish the basement in her home and landscape her yard?

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