Question 1

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

Accepted Answer

Renting a residence may provide flexibility in terms of location, lower upfront costs, and less responsibility for maintenance and repairs compared to owning a home. However, the tax advantages of owning a home, such as deductions for mortgage interest and property taxes, may not be available to renters. Therefore, in terms of tax advantages, owning a home may be better than renting.

Question 2

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.

Accepted Answer

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

Question 3

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.

Accepted Answer

This is true according to the IRS rules on deducting home mortgage interest. If a taxpayer does not use their home for personal purposes for at least 15 days during the year, and rents it out for at least one day, they are considered to be using the property for business or investment purposes and are not eligible to deduct any home mortgage interest expense on a loan secured by the home.

Question 4

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

Accepted Answer

Generally, a taxpayer must include in gross income any gain realized from the sale or exchange of property, including a principal residence. However, there are certain exceptions and exclusions that may apply, such as the exclusion for up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of a principal residence if certain requirements are met.

Question 5

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

Accepted Answer

The statement is false. Taxpayers can exclude gain on the sale of a principal residence once every two years, as long as they have lived in the home for at least two out of the past five years before the sale. There are also certain exceptions that may allow for an additional exclusion within the two-year period, such as due to a change in employment, health reasons, or unforeseen circumstances.

Question 6

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.

Accepted Answer

The maximum amount of debt on which a taxpayer may deduct home mortgage interest is limited to $1,000,000 of acquisition indebtedness for debt incurred before 12/15/2017.

Question 7

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.

Accepted Answer

This statement is true according to IRS rules. If a taxpayer has used a principal residence as a rental property after 2005, they will not be able to exclude the portion of the gain attributable to depreciation, even if they meet the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount. This is because the depreciation taken on the property during the rental period reduces the taxpayer's basis in the property, resulting in a higher gain upon sale.

Question 8

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.

Accepted Answer

Days when a home is available for rent but not actually rented out do not count either as personal days or rental days.

Question 9

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.

Accepted Answer

A taxpayer must have used the home as their principal residence for at least two of the five years preceding the sale, not necessarily at the time of the sale.

Question 10

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.

Accepted Answer

The number of days to determine residence status is fourteen days.

Question 11

A personal residence is not a capital asset.

Accepted Answer

A personal residence is considered a capital asset for tax purposes, though there are some exceptions and special rules that apply to the sale of a primary residence.

Question 12

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.

Accepted Answer

If a taxpayer has nonqualified use of their home before selling, they may not be able to exclude all of their realized gain, even if they meet the ownership and use tests. This is because they would have to allocate a portion of the gain to the period of nonqualified use.

Question 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.

Accepted Answer

One spouse must meet the ownership test and both must meet the use test.

Question 14

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.

Accepted Answer

According to IRS Publication 523, the periods of ownership and use of the property do not need to be continuous and do not have to cover the same two-year period for a taxpayer to qualify for the exclusion of gain on the sale of a principal residence. However, there are certain requirements regarding the length of ownership and use that must be met.

Question 15

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

Accepted Answer

Taxpayers meeting certain requirements, such as owning and using the property as their principle residence for at least two out of the five years before the sale, may be allowed to exclude up to $250,000 ($500,000 for married couples filing jointly) of gain realized on the sale of a principal residence.

Question 16

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

Accepted Answer

The tax laws provide incentives for homeownership through deductions for mortgage interest, property taxes, and in some cases, capital gains exemptions. Renters generally do not have access to these tax benefits.

Question 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.

Accepted Answer

This is true under special circumstances such as a change in employment, health or unforeseen circumstances, as outlined in IRS Publication 523.

Question 18

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

Accepted Answer

A limitation is placed on the amount of acquisition indebtedness and home-equity indebtedness.

Question 19

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.

Accepted Answer

Days when a home is available for rent but not actually rented out do not count either as personal days or rental days.

Question 20

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.

Accepted Answer

According to IRS rules, a taxpayer can qualify for the home sale exclusion even if they have moved out of the home and are renting it to another person at the time of the sale. However, there are certain criteria that need to be met, such as the taxpayer having owned and used the home as their main home for at least two out of the previous five years before the sale.

Quiz 14: Tax Consequences of Home Ownership

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

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.

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.

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

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

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.

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.

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.

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.

A personal residence is not a capital asset.

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.

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.

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.

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

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

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.

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

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.

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.