Question 1

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

Accepted Answer

Taxpayers with high AGI are still allowed to deduct home mortgage interest expense, but there may be limitations and phase-outs based on income levels.

Question 2

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

Accepted Answer

Expenses related to rental use of a vacation home are deductible for AGI, subject to certain limitations and requirements.

Question 3

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 paying points upfront to lower the interest rate can result in significant long-term savings on interest payments, which becomes more valuable the longer the homeowner stays in the home without refinancing.

Question 4

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 5

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 deduction is based on proportion of the year the taxpayer lived in the home no matter who actually pays the tax.

Question 6

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 uses the total personal and rental days as the denominator whereas the tax court method uses the entire year. The tax court method results in a smaller percentage allocated to rental days and larger percentage allocated to personal use.

Question 7

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 8

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

Accepted Answer

Under the "Masters Rule," if the individual rents her personal residence for 14 days or less during the year and uses the property for personal purposes for more than 14 days or 10% of the total days rented (whichever is greater), she does not have to pay tax on the rental income. This rule only applies if the individual rents her personal residence, not a second home or investment property.

Question 9

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

Accepted Answer

Taxpayers who rent out a property must report the rental income and expenses on Schedule E, which is a supplemental form to the individual tax return.

Question 10

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 the tax code. This means that it can only be used to offset passive activity income, such as other rental income or certain investments. It cannot be used to offset active income from a job or other non-passive sources.

Question 11

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

The deduction timing is based on when the actual taxes are paid to the taxing jurisdiction, not when the homeowner makes payments for taxes to the escrow account.

Question 12

A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Accepted Answer

Taxpayers can also deduct home mortgage interest on debt incurred to substantially improve their home, in addition to debt incurred to acquire or construct the home.

Question 13

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

The home is considered a nonresidence. When property that is rented during the tax year is used for even a day for personal purposes, the expenses must be allocated between the rental usage and personal usage.

Question 14

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, when a taxpayer uses a property as both a personal residence and rental property, expenses must be allocated between the two uses based on the number of days the property is used for each purpose. In this case, since Jennifer rented the property for 364 days and used it for personal purposes for one day, she must allocate expenses accordingly.

Question 15

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 statement is true. Taxpayers must allocate indirect expenses (such as utilities, insurance, and maintenance) between personal use and home office use, and only the expenses allocated to the home office use are deductible.

Question 16

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 according to IRS rules. Taxpayers must prorate their expenses based on how many days the home is used for personal use and how many days it is rented out.

Question 17

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

Accepted Answer

This is a provision in the recently enacted Tax Cuts and Jobs act effective in 2018.

Question 18

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 19

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

This is correct. The amount of depreciation allocated to rental use is based on the number of rental days over the total number of days (rental days plus personal use days). This is because depreciation can only be taken on the portion of the property that is used for rental purposes, not for personal use.

Question 20

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.

Quiz 14: Tax Consequences of Home Ownership