Deck 14: Tax Consequences of Home Ownership

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False
Explanation: The taxpayer must have owned the property for two or more years.

Question 3

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 home mortgage interest expense on a loan secured by the home.

Answer 3

True

Question 4

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

Question 5

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.

Question 6

20) Jacoby purchased a home in 2016 for $1,500,000 by making a $150,000 down payment and by borrowing the remaining $1,350,000 with a loan secured by the home. He made interest only payments for 2016, 2017, and 2018. In 2018, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

Question 7

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

Question 8

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

Question 9

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.

Question 10

5) 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.

Question 11

3) A personal residence is not a capital asset.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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

Question 16

1) In general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence.

Question 17

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.

Question 18

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

Question 19

6) 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 20

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.

Question 21

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

Question 22

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

Question 23

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.

Question 24

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.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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.

Question 30

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

Question 31

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

Question 32

34) 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 33

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.

Question 34

26) 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 35

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.

Question 36

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.

Question 37

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

Question 38

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

Question 39

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 40

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.

Question 41

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

Question 42

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

Question 43

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

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

Question 44

60) Patricia purchased a home on January 1, 2017 for $1,200,000 by making a down payment of $100,000 and financing the remaining $1,100,000 with a 30-year loan, secured by the residence, at 6 percent. During year 2017 and 2018, Patricia made interest-only payments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during 2018 may she deduct as an itemized deduction? (Assume not married filing separately.)

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

Question 45

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

Question 46

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).

Question 47

51) Dawn (single) purchased her home on July 1, 2008. On July 1, 2017 Dawn moved out of the home. She rented out the home until July 1, 2018 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 2018 gross income?

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

Question 48

52) Michael (single) purchased his home on July 1, 2008. He lived in the home as his principal residence until July 1, 2016 when he moved out of the home and rented it out until July 1, 2017 when he moved back into the home. On July 1, 2018 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2018 gross income?

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

Question 49

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

Question 50

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

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

Question 51

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

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

Question 52

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.
D) None of these statements is True.

Question 53

49) On February 1, 2018 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 2018 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 2019.
B) Stephen will be eligible to exclude gain on home 2 only if he waits until 2023 to sell it.
C) In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2018.
D) None of these is a True statement.

Question 54

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

A) Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.
B) Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.
C) Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but may not deduct interest on home equity indebtedness.
D) None of these statements are correct.

Question 55

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

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

Question 56

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

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

Question 57

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

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

Question 58

59) Patrick purchased a home on January 1, year 2018 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 2018, Patrick made interest-only payments on the loan of $30,000. On July 1, 2018, 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 2018, 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 2018 may he deduct as an itemized deduction if he used the $75,000 from the July 1 loan to purchase a car?

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

Question 59

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

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

Question 60

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

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

Question 61

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

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

Question 62

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

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

Question 63

76) 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 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 the year may not exceed the amount of her rental receipts (she may not report a loss from the rental property).
D) All of these statements are correct.

Question 64

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

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

Question 65

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

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

Question 66

65) Amanda purchased a home for $1,000,000 in 2016. She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in year 2021 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing, paid off the first mortgage, and used the remainder for purposes unrelated to the home. What is her total amount of her amount of acquisition indebtedness for purposes of determining the deduction for home mortgage interest? (Assume not married filing separately.)

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

Question 67

75) 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 include the rental receipts in gross income and deduct the rental expenses for AGI.
B) Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI.
C) 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.
D) Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.

Question 68

66) On March 31, year 1, Mary borrowed $200,000 to buy her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's year 1 deduction for her points paid?

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

Question 69

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

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

Question 70

68) Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

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

Question 71

79) 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)?

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.
E) None of these statements is correct.

Question 72

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

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

Question 73

74) 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 (home is not the relative's principal residence).
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.

Question 74

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

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

Question 75

62) Jessica purchased a home on January 1, 2018 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 2018 and 2019, Jessica made interest-only payments on this loan of $18,000 (each year). On July 1, 2018, 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 2018, she made interest-only payments on the second loan in the amount of $5,000. During 2019, 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 2019 may she deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home and landscape her yard? (Assume not married filing separately.)

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

Question 76

78) 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.

Question 77

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

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

Question 78

77) 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.
D) None of these statements are correct.

Question 79

80) 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 False?

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.

Question 80

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) $150.
C) $4,500.
D) $6,000.