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Exam 14: Tax Consequences of Home Ownership

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Question 71

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On November 1, year 1, Jamie (who is single) purchased and moved into her principal residence. In the early part of year 2, Jamie was laid off from her job. On February 1, year 2, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in year 2?

A) $0.
B) $3,125.
C) $31,250.
D) $35,000.

E) A) and D)
F) B) and C)

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Question 72

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Joshua and Mary Sullivan purchased a new home on October 1 of year 1 for $400,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be 1 percent of the property's value. Because the taxing jurisdiction collects taxes on a July 1 year-end, it was estimated that the Sullivans would be required to pay $3,000 in property taxes for the property tax year relating to October through June of year 2 ($400,000 × 1% × 9/12). The seller would be required to pay the $1,000 for July through September of year 1. Along with their monthly payment of principal and interest, the Sullivans paid $333 a month to the mortgage company to cover the property taxes. The mortgage company placed the money in escrow and used the escrow funds to pay the $3,000 property tax bill in July of year 2. The Sullivans' itemized deductions exceed the standard deduction before considering property taxes. What amount are the Sullivans allowed to deduct for property taxes relating to the property in year 1 (ending July 1, year 1)and year 2 (ending July 1, year 2)?

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$0 in year 1; $3,000 in year 2.They did ...

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Question 73

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Amelia is looking to refinance her home loan of $200,000. She has the option of (1)paying no discount points on the loan and paying interest at 7 percent or (2)paying 2 discount points on the loan and paying interest of 6 percent on the loan. Both options require Amelia to make interest-only payments for the first five years of the loan and pay back the loan over the 25 years after that (it is a 30-year loan). Amelia itemizes deductions irrespective of any interest expense she may pay. Amelia's marginal ordinary income tax rate is 32 percent. What is Amelia's break-even point in years? (For simplicity, ignore time value of money concerns.)

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

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.

A taxpayer who otherwise meets the ownership and use testson the sale of her principal residence may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.

Which of the following statements regarding the home office expense deduction is correct?