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Exam 14: Tax Consequences of Home Ownership

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Question 21

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Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

A) All else equal,the break-even point for paying points on an original mortgage is longer than the break-even point for paying points on a refinance.
B) All else equal,the break-even point for paying points on an original mortgage is longer for a taxpayer who does not make extra principal payments each year on the loan than for a taxpayer who does make additional principal payments each year on the loan.
C) All else equal,the break-even point for a taxpayer paying points on an original mortgage is longer when the taxpayer's marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed.
D) None of these statements is correct.

E) B) and D)
F) None of the above

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Question 22

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Dawn (single) purchased her home on July 1,2004.On July 1,2012 Dawn moved out of the home.She rented out the home until July 1,2013 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation) .What amount of the gain is Dawn allowed to exclude from her 2013 gross income?

A) $0
B) $207,000
C) $225,000
D) $230,000

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

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Question 23

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Larry owned and lived in a home for five years before marrying Darlene.Larry and Darlene lived in the home for one year before selling it at a $600,000 gain.Larry was the sole owner of the residence until it was sold.How much of the gain may Larry and Darlene exclude?

On March 31,2013,Mary borrowed $200,000 to buy her principal residence.Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent.The loan is for a 30-year period.What is Mary's 2013 deduction for her points paid?

Which of the following statements regarding home-related transactions is correct?

Brady owns a second home that he rents to others.During the year,he used the second home for 50 days for personal use and for 100 days for rental use.Brady collected $20,000 of rental receipts during the year.Brady allocated $7,000 of interest expense and property taxes,$10,000 of other expenses,and $4,000 of depreciation expense to the rental use.What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year,if any?

Patrick purchased a home on January 1,2013 for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan,secured by the residence,at 6 percent.During 2013 Patrick made interest-only payments on the loan of $30,000.On July 1,2013,when his home was worth $600,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent.During 2013,he made interest-only payments on this loan in the amount of $3,000.What amount of the $33,000 interest expense Patrick paid during 2013 may he deduct as an itemized deduction?

Which of the following statements regarding the IRS and/or Tax Court approaches to allocating home-related expenses between rental use and personal use is correct?

When a taxpayer rents a residence for part of the year,the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer's

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

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.

Taxpayers with home offices and 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 for AGI.

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.

Kimberly purchased a home on January 1,2012 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan,secured by the residence,at 6 percent.During 2012 and 2013 Kimberly made interest-only payments on the loan in the amount of $18,000 each year.On July 1,2012,when her home was worth $500,000,Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent.During 2012,she made interest-only payments on this loan in the amount of $5,000 and during 2013,she made interest only payments on the loan in the amount of $10,000.What is the maximum amount of the $28,000 interest expense Kimberly paid during 2013 that she may deduct as an itemized deduction,if she used the proceeds of the second loan to pay off student loans from law school?

Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on the sale of a principal residence.

Which of the following statements regarding the first time home buyer credit is correct?

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.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.

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

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

Ethan (single) purchased his home on July 1,2004.On July 1,2011 he moved out of the home.He rented the home until July 1,2013 when he moved back into the home.On July 1,2014 he sold the home and realized a $210,000 gain.What amount of the gain is Ethan allowed to exclude from his 2014 gross income?