Question 1

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

The taxpayer may still qualify for a partial exclusion if the sale is due to a change in place of employment, health reasons, or unforeseen circumstances.

Question 2

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

This statement is true. Taxpayers who meet certain requirements, such as using the home as their primary residence for a certain amount of time, may be allowed to exclude up to $250,000 (or $500,000 for married couples filing jointly) of gain realized on the sale of their principal residence.

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

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 5

A personal residence is not a capital asset.

Accepted Answer

A personal residence is considered a capital asset, but it may be eligible for certain tax exclusions or deductions.

Question 6

A taxpayer who sells a principal residence that has been used (or is being used) as a rental property since 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 is because the taxpayer has taken depreciation deductions on the property while it was being used as a rental property, and the amount of the gain attributable to depreciation must be recaptured (i.e. taxed) upon sale of the property. This recaptured depreciation is not eligible for the home sale exclusion.

Question 7

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 8

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

Accepted Answer

Renting a residence can provide flexibility in terms of moving, no maintenance or repair costs, and no property tax or homeowner association fees. These advantages may outweigh the tax benefits of owning a home.

Question 9

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. The Taxpayer Relief Act of 1997 allows a taxpayer to exclude up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of a principal residence as long as they have owned and used the property as their main home for at least two out of the five years preceding the sale. There is no limit to the number of times a taxpayer can take advantage of this exclusion, as long as they meet the eligibility requirements.

Question 10

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 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

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 13

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 14

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

According to IRS rules, a taxpayer who rents out a home for at least one day and does not use it for personal purposes for at least 15 days during the year is considered to have a rental property and is not eligible to deduct any qualified residence interest expense on a loan secured by the home.

Question 15

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 interest expense on the portion of the loan used to purchase or improve the home (up to $1,100,000) is deductible as mortgage interest on Schedule A of Jacoby's tax return.

Question 16

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 the IRS, a taxpayer can still qualify for the home sale exclusion (up to $250,000 for individuals or $500,000 for married couples filing jointly) if they have owned and used the home as their primary residence for at least 2 out of the 5 years preceding the sale, even if they have moved out and are renting the home at the time of the sale. However, there are some additional rules and limitations to consider in these situations, so it's important to consult with a tax professional.

Question 17

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 the home before selling, they may not be able to exclude all of their realized gain. This is because the exclusion is based on the ratio of time the home was used as the taxpayer's primary residence to the total time the home was owned, and any nonqualified use reduces this ratio.

Question 18

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 several tax benefits to homeowners, such as the mortgage interest deduction, property tax deduction, and capital gains exclusion for the sale of a primary residence. Renters, on the other hand, do not have access to these tax benefits. Therefore, in general, tax laws favor taxpayers who own a principal residence.

Question 19

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 do not need to be continuous or cover the same two-year period to qualify for the exclusion of gain on the sale of a principal residence. However, certain limitations and requirements must be met, such as living in the home for at least two out of the five years prior to the sale.

Question 20

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

Accepted Answer

Under certain circumstances, a taxpayer may be required to include in gross income any gain realized from the sale of their principal residence. However, there are several exceptions and rules that apply, such as the home is owned and used by the taxpayer as their main home for at least 2 out of the 5 years prior to the sale.

Quiz 14: Tax Consequences of Home Ownership