Question 1

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 qualified residence interest expense on a loan secured by the home.

Accepted Answer

This is true according to the IRS guidelines on deducting qualified residence interest expenses for rental properties.

Question 2

A taxpayer who sells a principal residence that has been used (or is being used) as a rental property 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 is known as the "recapture rule" and requires the taxpayer to pay taxes on the portion of the gain equal to the depreciation that was claimed during the time the property was used as a rental.

Question 3

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 4

When determining the number of days a taxpayer has rented 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

The answer of When determining the number of days a...

Question 5

Jacoby purchases a home 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. Jacoby can deduct interest expense on $1,100,000 of the loan principal.

Accepted Answer

The $1,100,000 is the limit on the amount of mortgage debt for which Jacoby can deduct the interest expense under the IRS rules. Since the loan amount of $1,350,000 is less than the limit, Jacoby can deduct the interest on the $1,100,000 portion of the loan.

Question 6

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

The periods of ownership and use may be separate and non-concurrent, as long as they total at least two out of the last five years.

Question 7

The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may deduct in a particular year.

Accepted Answer

The answer of The tax laws place a fixed dollar...

Question 8

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

Accepted Answer

This is because homeowners are able to deduct mortgage interest and property taxes on their income tax returns, which reduces their taxable income. Renters cannot deduct their rent payment on their income tax returns. Additionally, homeowners may be eligible for capital gains exclusions when they sell their principal residence, which can further reduce their tax liability.

Question 9

When determining the number of days a taxpayer has rented 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

The answer of When determining the number of days a...

Question 10

A taxpayer may be required to pay tax on a gain the taxpayer realizes when she sells her principal residence.

Accepted Answer

While there are certain exemptions and exclusions that may apply, a taxpayer may be required to pay tax on a gain realized from the sale of their principal residence. This is generally applicable if the gain exceeds certain thresholds or if the taxpayer does not meet certain ownership and use requirements. It is important to consult a tax professional regarding the tax implications of selling a principal residence.

Question 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.

Accepted Answer

The taxpayer must have used the home as their principal residence for at least two out of the five years leading up to the sale, but they do not need to be living in the home at the time of the sale.

Question 12

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

The answer of A married couple filing a joint tax...

Question 13

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

This statement is false. Taxpayers may be able to exclude gain on the sale of a principal residence more than once every five years if they meet certain qualifications such as a change in place of employment, health reasons, or unforeseen circumstances.

Question 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.

Accepted Answer

According to IRS guidelines, a taxpayer can still qualify for the home sale exclusion (up to $250,000 for single filers or $500,000 for joint filers) as long as they owned and used the property as their primary residence for at least two out of the five years preceding the sale. Renting out the property does not disqualify them from taking the exclusion. However, if they have claimed depreciation on the property as a rental, they may have to recapture some of that depreciation as income.

Question 15

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 allowed to exclude all of their realized gain. Nonqualified use includes using the home as a vacation home, renting it out, or any other use that does not meet the ownership and use tests for a primary residence. This may result in the taxpayer having to pay taxes on a portion of their realized gain.

Question 16

A personal residence is not a capital asset.

Accepted Answer

A personal residence is considered a capital asset, but there are certain tax exclusions and deductions available for homeowners.

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 known as the "unforeseen circumstances" exception and allows for the exclusion of gain if the home is sold due to certain unforeseen circumstances, such as a change in employment, health issues or other unforeseen events. The requirements and limitations for this exception are outlined in the IRS Publication 523.

Question 18

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 ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for at least two years during the five-year period ending on the date of sale.

Question 19

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

The IRS allows taxpayers meeting certain requirements to exclude up to $250,000 (or $500,000 for married couples filing jointly) of gain realized on the sale of a principal residence.

Question 20

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

Accepted Answer

Renting a residence can offer flexibility, lower upfront costs, and may not require ongoing maintenance and repairs, which can be advantages for some individuals. However, owning a home can provide potential tax benefits such as mortgage interest deduction and property tax deduction.

Quiz 14: Tax Consequences of Home Ownership