Question 1

Michael (single)purchased his home on July 1,2009.He lived in the home as his principal residence until July 1,2017,when he moved out of the home,and rented it out until July 1,2018,when he moved back into the home.On July 1,2019,he sold the home and realized a $300,000 gain.What amount of the gain is Michael allowed to exclude from his 2019 gross income?

Accepted Answer

Under the current tax laws, a taxpayer can exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of the gain from the sale of a principal residence if they have owned and lived in the home for at least two out of the five years preceding the sale. In this case, Michael meets this requirement as he owned and lived in the home as his principal residence for eight years (from July 1, 2009 to July 1, 2017). Therefore, he can exclude up to $250,000 of the $300,000 gain from his gross income.

Question 2

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

Accepted Answer

For the purposes of determining a taxpayer's deductible home mortgage interest expense, a qualified residence includes the taxpayer's principal residence and one other residence chosen by the taxpayer. This allows for the deduction of interest on a primary home and one additional home, provided the loans meet other IRS criteria.

Question 3

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

Accepted Answer

The maximum amount of gain on the sale of a principal residence that a married couple filing jointly may exclude from gross income is $500,000, provided they meet certain ownership and use requirements.

Question 4

Dawn (single)purchased her home on July 1,2008.On July 1,2018,Dawn moved out of the home.She rented out the home until July 1,2019,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 2019 gross income?

Accepted Answer

The answer of Dawn (single)purchased her home on July 1,2008.On...

Question 5

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)?

Accepted Answer

To be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet the ownership and use test. The ownership test requires that the taxpayer has owned the home for at least 2 years during the 5-year period ending on the date of sale. The use test requires that the taxpayer has used the home as his or her principal residence for at least 2 years during the same 5-year period. Therefore, both ownership and use tests must be met. The rental test and business use test are not relevant in determining eligibility for the exclusion.

Question 6

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

Accepted Answer

The correct statement is that what a bank might call a "home equity loan" the tax laws will call acquisition indebtedness if the loan is secured by the home and the taxpayer uses the loan proceeds to substantially improve the home. Taxpayers may deduct interest expense on a limited amount of home equity indebtedness only if the loan is not used to substantially improve the home, but they may deduct interest expense on an unlimited amount of home acquisition indebtedness. Option A and B have mixed up the limits for deducting interest on home equity indebtedness and home acquisition indebtedness. Option D is incorrect as there is a correct statement.

Question 7

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?

Accepted Answer

When an individual is married, they may exclude up to $500,000 of gain on the sale of a primary residence as long as they owned and lived in the home for at least two of the five years preceding the sale. In this case, Shantel meets both of these requirements and therefore she and Daron may exclude up to $500,000 of the gain.

Question 8

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

Accepted Answer

For tax purposes, a taxpayer can only have one principal residence at any given time, and a principal residence can include a houseboat if it is used as a home. There is no provision allowing a taxpayer to annually elect which residence is considered to be the principal residence.

Question 9

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).

Accepted Answer

This is the general rule for deducting home office expenses on your taxes. The total deductible expenses cannot exceed the gross income from your business minus unrelated business expenses.

Question 10

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?

Accepted Answer

The $50,000 gain that was not excluded is considered a long-term capital gain because Serena owned and lived in the property as her primary residence for at least 2 out of the 5 years preceding the sale. Therefore, the gain is subject to long-term capital gains tax rates.

Question 11

Patricia purchased a home on January 1,2017,for $1,200,000 by making a down payment of $100,000 and financing the remaining $1,100,000 with a loan,secured by the residence,at 6 percent.From 2017 through 2019,Patricia made interest-only payments on the loan each year in the amount of $66,000.What amount of the $66,000 interest expense that Patricia paid during 2019 may she deduct as an itemized deduction? (Assume not married filing separately.)

Accepted Answer

The maximum amount of mortgage debt on which interest can be deducted under the new tax law (TCJA) changed from $1,000,000 to $750,000 for mortgages taken out after December 14, 2017. However, loans taken out before that date are grandfathered in under the old $1,000,000 limit. Since Patricia’s loan was taken out before the new tax law, she can deduct the full $66,000 interest expense paid in 2019 on her itemized deduction.

Question 12

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

Accepted Answer

A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion. However, only one home can be designated as the taxpayer's principal residence at a time and the taxpayer must meet the ownership and use tests.

Question 13

On February 1,2019,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 2019 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?

Accepted Answer

The rules for excluding gain on the sale of a principal residence allow for an exclusion of up to $250,000 ($500,000 for married taxpayers filing jointly) of gain if the taxpayer meets certain ownership and use tests. If Stephen meets these tests for both homes, he may be eligible to exclude gain on the sale of home 2, even if he sells it in 2019. It is not necessary for him to wait until 2024 (as stated in choice B), and it is not true that he can under no circumstance exclude gain on home 2 (as stated in choice A). Therefore, the correct answer is C.

Question 14

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?

Accepted Answer

Jamie qualifies for the exclusion of gain on the sale of a principal residence. To qualify for the exclusion, the homeowner must have owned and used the home as a principal residence for at least 2 of the 5 years preceding the sale. In this case, Jamie purchased and moved into the home on November 1, year 1, and sold it on February 1, year 2, which is less than 2 years. However, an exception to the ownership and use requirement applies for those who sell their home due to unforeseen circumstances, such as a change in employment. Jamie's layoff and employment opportunity in a different state qualifies as an unforeseen circumstance. Therefore, she may exclude a portion of the gain based on the amount of time she owned and used the home as a principal residence. As Jamie owned and used the home as a principal residence for approximately 3 months, which is 25% of the 12 months in the year of the sale, she may exclude 25% of the gain, which is $35,000 x 25% = $8,750. Therefore, the correct answer is C.

Question 15

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:

Accepted Answer

According to IRS Publication 936, if a taxpayer rents out a residence for part of the year, they must use the residence as their personal residence for either (a) more than 14 days or (b) more than 10 percent of the number of days during the year that the residence is rented at a fair rental price. The taxpayer must also limit their rental use of the residence to the greater of (a) 14 days or (b) 10 percent of the number of days during the year that the residence is rented at a fair rental price. Therefore, the personal use of the home must exceed the greater of 14 days or 10 percent of the rental use for the home to be eligible as a qualified residence for the home mortgage interest expense deduction.

Question 16

Patrick purchased a home on January 1,2019,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 2019,Patrick made interest-only payments on the loan of $30,000.On July 1,2019,when his home was worth $600,000,Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent.He used the $75,000 loan proceeds to purchase a new car.During 2019,he made interest-only payments on this loan in the amount of $3,000.What amount of the $33,000 interest expense that Patrick paid during 2019 may he deduct as an itemized deduction?

Accepted Answer

Patrick can deduct the $30,000 interest paid on the original mortgage as it is secured by his residence and used to acquire the home. The $3,000 interest on the additional loan is not deductible because the loan proceeds were used to purchase a car, not for home acquisition or improvement.

Question 17

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

Accepted Answer

The simplified method allows taxpayers to use a standard rate for calculating home office expenses based on the square footage of the home office. This rate includes expenses such as rent, utilities, and maintenance, but does not include depreciation expense.

Question 18

Ethan (single)purchased his home on July 1,2009.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 1,2018,when he moved back into the home.On July 1,2019,he sold the home and realized a $210,000 gain.What amount of the gain is Ethan allowed to exclude from his gross income?

Accepted Answer

According to the rules of the primary residence exclusion, a taxpayer can exclude up to $250,000 ($500,000 for married couples) of gain on the sale of their principal residence, as long as they have lived in the home for at least two of the previous five years before the sale. In this case, Ethan lived in the home for seven years before renting it out for two years and then moving back in for one year before selling it. Therefore, he meets the two-out-of-five-years requirement and can exclude up to $250,000 of the gain. However, since the gain was only $210,000, he can exclude the entire amount and his answer is B.

Question 19

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

Accepted Answer

When a taxpayer uses a residence as both a rental property and a personal residence, and claims depreciation expense on the property, this depreciation must be recaptured upon sale. This means that the taxpayer cannot exclude the portion of the gain equal to the depreciation taken after May 6, 1997, from the income, even if they meet the ownership and use tests and the gain is less than the exclusion limit.

Question 20

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?

Accepted Answer

Larry may exclude $250,000 of the gain because he owned and lived in the home for five years before marrying Darlene.

Quiz 14: Tax Consequences of Home Ownership