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Exam 14: Tax Consequences of Home Ownership

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Question 41

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When a taxpayer experiences a net loss from a nonresidence (rental property) :

A) the taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources.
B) the loss is fully deductible against the taxpayer's ordinary income no matter the circumstances.
C) if the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does not have any sources of passive income.
D) if the taxpayer is not allowed to deduct the loss due to the passive activity loss limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

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

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Question 42

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

A) The limit on acquisition indebtedness depends on filing status.
B) The limit on acquisition indebtedness applies to one (not multiple) loans.
C) The limit on acquisition indebtedness applies only in the year of acquisition.
D) Taxpayers who do not itemize deductions can still deduct home mortgage interest as a from AGI deduction.

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

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Question 43

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Lebron Taylor purchased a home on July 1, 2018, for $500,000. Lebron paid for the entire purchase price with cash. On January 1, 2019, Lebron needed additional cash for purposes unrelated to his home, so he took out a loan secured by the residence for $150,000. During 2019, he made interest-only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2019?

Nelson Whiting (single)purchased a home in Denver, Colorado, for $300,000. He moved into the home on July 1 of year 1. He lived in the home as his primary residence until December 1, year 2, when he sold the home for $450,000. Nelson sold the home because he needed to move to change jobs and his new job was located several hundred miles away. What amount of gain must Nelson recognize on the home sale in year 2?

On July 1 of year 1, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%) . On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year. (Elaine was liable for the taxes because she owned the property when they became due.) What amount of real property taxes is Elaine allowed to deduct for year 1? (Assume not married filing separately.)

Several years ago, Chara acquired a home that she vacationed in part of the time and she rented part of the time. During the current year Chara: -Personally stayed in the home for 14 days, -Rented it at full fair market value to her parents for eight days, -Rented it to her sister for five days at half price, -Rented it to her friend at a discounted rate for three days, -Rented it to another friend at fair market value for six days, -Rented the home to third parties for 42 days at the market rate, -Did repair and maintenance work for three days to keep the home ready for renters, and -Marketed the property and made it available for rent for 120 days during the year even though it was not rented during this time. How many days of personal use and how many days of rental use did Chara experience on the property during the year?

In general terms, the tax laws favor taxpayers who own a principal residence over those who rent a principal residence.

Alfredo is self-employed and he uses a room in his home as his principal place of business. He meets clients there and doesn't use the room for any other purpose. The size of his home office is 600 square feet. The size of his entire home is 3,000 square feet. During the current year, Alfredo received $10,000 of gross income from his business activities, and he reports $7,500 of business expenses unrelated to his home office. For his entire home, he reported $10,000 of mortgage interest, $2,000 of property taxes, $2,500 of home operating expenses, and $4,500 of depreciation expense. What amount of home office expenses is Alfredo allowed to deduct in the current year? (Assume he uses the actual expense method of computing home office expenses.)Indicate the amount and type of expenses he must carry over to next year, if any.

Harvey rents his second home. During the year, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income for the year?

Ashton owns a condominium near San Diego, California. This year, he incurs the following expenses in connection with his condo: During the year, Ashton rented the condo for 120 days and he received $24,000 of rental receipts. He did not use the condo at all for personal purposes during the year. Ashton is considered to be an active participant in the property. Ashton's AGI from all sources other than the rental property is $120,000. Ashton does not have passive income from any other sources. What is Ashton's AGI?

Darren (single)purchased a home on January 1, 2015, for $400,000. Darren lived in the home as his primary residence until January 1, 2017, when he began using the home as a vacation home. He used the home as a vacation home until January 1, 2018. (He used a different home as his primary residence from January 1, 2017, to January 1, 2018.)On January 1, 2018, Darren moved back into the home and used it as his primary residence until January 1, 2019, when he sold the home for $500,000. What amount of the $100,000 gain Darren realized on the sale must he recognize for tax purposes in 2019?

Ethan (single) purchased his home on July 1, 2009. He lived in the home as his principal residence until July 1, 2016, when he moved out of the home, and rented it out until July 1, 2018, when he moved back into the home. On July 1, 2019, he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his gross income?

A taxpayer who sells a principal residence that has been used as a rental property after 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.

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

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for more than 14 days during the year is ineligible to deduct any home mortgage interest expense on a loan secured by the home.

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.

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)?

A personal residence is not a capital asset.

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.