Question 1

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home between personal and rental use.

Accepted Answer

This is correct as per IRS rules, taxpayers who use a vacation home for both personal and rental use are required to allocate expenses associated with the home between personal and rental use. This helps determine the deductible rental expenses and taxable rental income.

Question 2

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to rental use is based on the number of rental days over rental days plus personal-use days.

Accepted Answer

Depreciation expense is allocated based on the percentage of time the vacation home is used for rental purposes. This is determined by dividing the number of rental days by the total number of days the vacation home is used (rental days plus personal-use days).

Question 3

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

Accepted Answer

The limitation under tax law for itemized deductions generally applies to state and local taxes (SALT), not directly to home mortgage interest. The home mortgage interest deduction allows taxpayers to deduct interest on up to $750,000 ($375,000 if married filing separately) of qualified residence loans.

Question 4

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.

Accepted Answer

The Tax Court method of allocation tends to allocate more expenses to personal use than does the IRS method of allocation.

Question 5

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

Accepted Answer

If the taxpayer rents out her personal residence for fewer than 15 days per year, she does not have to report the rental income and can keep the money tax-free.

Question 6

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

Accepted Answer

Taxpayers who rent out a home, apartment, or other property would report the rental income and expenses on Schedule E of their tax return.

Question 7

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.

Accepted Answer

Taxpayers using the actual expense method for home office expenses must allocate indirect expenses of the home between personal and home office use, and only the expenses allocated to home office use are deductible on their tax returns.

Question 8

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.

Accepted Answer

Since Jorge used the home for personal purposes for more than the greater of 14 days or 10% of the days it was rented (which is 36 days), he must allocate expenses between rental and personal use according to IRS rules for mixed-use property.

Question 9

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

Accepted Answer

A tax loss from a rental home is considered a passive activity loss according to IRS rules.

Question 10

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

Accepted Answer

Taxpayers with high AGI are allowed to deduct home mortgage interest expense, but the amount of the deduction may be limited depending on their income level and other factors.

Question 11

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.

Accepted Answer

According to IRS rules, Jennifer is required to allocate expenses associated with the home between rental and personal use for the purpose of determining deductible rental expenses and personal use limitations.

Question 12

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

Accepted Answer

Expenses such as mortgage interest, property taxes, insurance, utilities, repairs, and depreciation can be allocated based on the amount of time the vacation home is rented out and are deductible for Adjusted Gross Income (AGI). However, expenses that are solely for personal use are not deductible.

Question 13

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

Accepted Answer

This is true according to the Tax Cuts and Jobs Act, which took effect in 2018. The deduction for state and local taxes is capped at $10,000 for individuals ($5,000 for married taxpayers filing separately).

Question 14

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.

Accepted Answer

For an original home mortgage, points paid upfront can generally be deducted in full in the year they are paid, while points paid on a refinanced mortgage must usually be deducted over the life of the loan.

Question 15

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.

Accepted Answer

The taxpayer is allowed to deduct only the portion of the property taxes that accrue from the date of purchase until the end of the tax year; the taxes must be prorated based on the portion of the year the taxpayer owned the property.

Question 16

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.

Accepted Answer

Taxpayers are allowed to deduct real property taxes only in the year the taxes are actually paid to the taxing authority, not when the estimated taxes are paid into an escrow account.

Question 17

When a taxpayer finances the initial acquisition of her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

Accepted Answer

Points paid for loan origination fees that are directly tied to the borrowing of money can be fully deductible in the year they are paid if they are paid for the purchase or improvement of a primary residence and meet certain other requirements. Points paid as prepaid interest or as loan origination fees both have potential for deduction under IRS rules.

Question 18

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

Total deductible home office expenses are indeed limited to the gross income derived from the business minus business expenses that are unrelated to the home, which is commonly referred to as net Schedule C income before home office expenses.

Question 19

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

Accepted Answer

Self-employed taxpayers can deduct home office expenses as for AGI deductions on Schedule C, but employees can no longer deduct home office expenses due to changes in tax law from the Tax Cuts and Jobs Act of 2017, which suspended unreimbursed employee expenses as itemized deductions through 2025.

Question 20

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.

Accepted Answer

This is because the savings in interest payments over the life of the loan will eventually outweigh the upfront cost of paying points.

Quiz 14: Tax Consequences of Home Ownership