Question 1

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 2

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

Accepted Answer

Taxpayers using the simplified method for computing home office expenses do not deduct depreciation expense for the home office use. The simplified method allows taxpayers to deduct $5 per square foot of the home used for business, up to a maximum of 300 square feet. It is an alternative to the traditional method, which requires more detailed calculations of actual expenses, including depreciation.

Question 3

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 correct rule for deducting home office expenses. The total deductible amount is limited to the gross income earned from the business minus any expenses not related to the home office.

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,...

Question 5

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 6

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

The exclusion amount for a single filer selling their primary residence is $250,000. In this case, Michael meets the ownership and use tests, so he is eligible for the full exclusion amount. Therefore, he can exclude $250,000 of the $300,000 gain from his gross income, resulting in a taxable gain of $50,000.

Question 7

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 and occupy two homes that are eligible for the home sale exclusion. Option A is incorrect as a taxpayer may not exclude gain if the taxpayer did not use the residence as the taxpayer’s principal residence for at least two years of the five-year period ending on the sale date. Option C is incorrect as a taxpayer may qualify for the exclusion even if the taxpayer does not live in the residence at the time of sale, as long as the taxpayer owned and used the property as the taxpayer’s principal residence for at least two years of the five-year period ending on the sale date. Option D is incorrect as only one spouse needs to meet the ownership and use tests to qualify for the $500,000 exclusion.

Question 8

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. This means that the taxpayer must have owned and used the home as their primary residence for at least 2 of the 5 years prior to the sale. The other choices, rental test and business use test, are not relevant to the exclusion of gain on the sale of a principal residence. The ownership test is part of the ownership and use test, so choice E is the best answer.

Question 9

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

The answer of Patrick purchased a home on January 1,...

Question 10

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 Tax Cuts and Jobs Act of 2017 changed the rules for excluding gain on the sale of a principal residence. Under the new law, a taxpayer can generally exclude up to $250,000 of gain ($500,000 if married filing jointly) if they owned and used the home as their principal residence for at least two of the five years leading up to the sale. Since Stephen sold his first home and purchased his second home on the same day, he meets this requirement for home 2. However, if Stephen sells home 2 in 2019, he will not have owned and used it as his principal residence for two years, so he would not meet the requirements for the full exclusion. However, there are some exceptions to the two-year rule, such as if the sale is due to a change in health or employment, or other unforeseen circumstances. Therefore, it is possible that Stephen could still exclude some or all of the gain on the sale of home 2 in 2019, depending on the circumstances.

Question 11

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 12

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

Shantel owned and lived in the home for five years, which means she meets the ownership and use test for the primary residence exclusion. Additionally, she has not excluded any gain from the sale of a different primary residence within the past two years. Therefore, she may exclude up to $250,000 of the gain from the sale of the home. Since she was married to Daron at the time of the sale, they can combine their exclusion amounts and exclude up to $500,000 of the gain. None of the choices state the maximum amount they can exclude, but C is the closest option at $500,000.

Question 13

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 14

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

The answer of Larry owned and lived in a home...

Question 15

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 both acquisition and home equity indebtedness.

Question 16

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 Serena was not able to exclude is considered a long-term capital gain. This is because she owned and lived in the home for at least two of the previous five years before the sale, which qualifies it for the favorable long-term capital gains tax rate.

Question 17

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 18

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

Patricia may deduct the interest paid on the loan to the extent that it does not exceed $750,000 indebtedness. However, since the loan was taken out in 2017, when the limit was $1,000,000, the $1,100,000 loan amount originally qualified under the former $1,000,000 limit. She may continue to claim the interest on that original $1,100,000. Since the amount of interest paid by Patricia in 2019 ($66,000) does not exceed the $1,100,000 limit, she may deduct the full amount of $66,000.

Question 19

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 owned and used the home as her principal residence for at least two out of the previous five years prior to the sale, so she meets the ownership and use tests for the primary residence exclusion. Also, Jamie did not purchase a new home within two years of the sale, so she does not have to pay back any previously claimed exclusion. Therefore, Jamie may exclude up to $250,000 of the gain from her gross income in year 2 ($35,000 gain - $0 purchase price adjustment = $35,000 realized gain, which is less than the maximum exclusion amount of $250,000).

Question 20

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 rules, a residence is only eligible as a qualified residence for the home mortgage interest expense deduction if the taxpayer's personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home. This means that the taxpayer must use the property for personal use for more than 14 days or for more than 10% of the total days that the property is rented out during the year, whichever is greater. So, option D is the correct answer.

Quiz 14: Tax Consequences of Home Ownership