Question 1

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

Accepted Answer

The allocation of depreciation expense between personal use and rental use is based on the number of rental days over rental days plus personal use days. This is known as the "rental use percentage".

Question 2

Taxpayers with high AGI are not allowed to deduct any interest on qualifying home equity indebtedness.

Accepted Answer

The answer of Taxpayers with high AGI are not allowed...

Question 3

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

This is correct according to IRS guidelines. Indirect expenses, such as utilities and insurance, must be allocated between personal and home office use, and only the portion allocated to the home office use is deductible.

Question 4

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 5

When a taxpayer finances 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

The answer of When a taxpayer finances her personal residence,...

Question 6

For regular tax purposes, a taxpayer may deduct interest expense on qualifying homeequity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home.

Accepted Answer

According to IRS rules, a taxpayer may deduct interest expense on qualifying home equity indebtedness regardless of how the loan proceeds are used. However, the total amount of the loan must not exceed the fair market value of the home and there are limits to the amount of interest that can be deducted.

Question 7

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

Accepted Answer

Tax losses from rental property are considered passive activity losses according to the IRS.

Question 8

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

Accepted Answer

This is true. Taxpayers must allocate expenses like mortgage interest, property taxes, and utilities between personal and rental use based on the number of days the home was used for each purpose.

Question 9

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

This is true according to IRS rules. Jennifer must allocate expenses such as mortgage interest, property taxes, and insurance between the rental period and the personal use day. The rental expenses can be deducted on Schedule E, while the personal use portion cannot be deducted.

Question 10

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

Accepted Answer

Under certain circumstances, such as renting the personal residence for 14 days or less per year, a taxpayer could earn rental income without having to pay any tax on it. This is known as the "Masters exemption" or the "14-day rule". However, if the taxpayer rents out the personal residence for more than 14 days, she may have to report the rental income on her tax return and pay taxes on it.

Question 11

Depending on AGI, taxpayers may be able to deduct mortgage insurance premiums as a for AGI deduction.

Accepted Answer

The answer of Depending on AGI, taxpayers may be able...

Question 12

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

When a taxpayer plans on living in a home for a longer period of time, the savings from the reduced interest rate obtained by paying points will be greater and will eventually outweigh the cost of paying points. Therefore, it makes economic sense to pay points for a reduced interest rate in the long run.

Question 13

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 a business expense on Schedule C, which goes towards calculating their AGI. Employees, on the other hand, can only deduct home office expenses as a miscellaneous itemized deduction from their AGI on Schedule A, subject to certain limitations.

Question 14

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 15

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 IRS method typically allocates more expenses to rental use, while the Tax Court method tends to allocate more expenses to personal use.

Question 16

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 17

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

Accepted Answer

This is true. Taxpayers who rent out a home or other property would report the rental income and expenses on Schedule E when filing their tax return.

Question 18

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

Accepted Answer

Expenses such as property taxes, mortgage interest, utilities, and repairs allocated to rental use of a vacation home can be deducted for AGI on Schedule E of the tax return. However, personal use expenses are not deductible for AGI.

Question 19

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 arelimited to net Schedule C income before home office expenses).

Accepted Answer

This statement is true. Deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home, which is known as net Schedule C income before home office expenses.

Question 20

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.

Quiz 14: Tax Consequences of Home Ownership