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Exam 14: Tax Consequences of Home Ownership

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Question 1

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Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo: $\begin{array} { l r } \text { Insurance } & \$ 1,000 \\\text { Mortgage interest } & 7,500 \\\text { Property taxes } & 3,200 \\\text { Repairs and maintenance } & 800 \\\text { Utilities } & 1,700 \\\text { Depreciation } & 5,700\end{array}$ During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assuming Tyson uses the Tax Court method of allocating expenses to rental use of the property. What is Tyson's net rental income for the year?

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Question 2

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In 2012, Gabby purchased a new home for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. In 2014, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, 2014, Gabby executed two home equity loans (both secured by the home) . The first was for $80,000 at an interest rate of 7 percent. The second home equity loan from a different bank was for $40,000 at an interest rate of 9 percent. In 2014, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home. What is the maximum amount of interest expense Gabby can deduct on these loans as home related interest expense?

A) $18,000
B) $25,400
C) $25,905
D) $27,200

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

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Question 3

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Ethan (single) purchased his home on July 1, 2005. On July 1, 2012 he moved out of the home. He rented the home until July 1, 2014 when he moved back into the home. On July 1, 2015 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2015 gross income?

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

Taxpayers who purchased a home in 2008 and received the first-time home buyer tax credit must (with a few limited exceptions) pay the credit back to the government in subsequent years.

On March 31, 2014, 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 2014 deduction for her points paid?

Alison Jacobs (single) purchased a home in Las Vegas, Nevada for $400,000. She moved into the home on September 1, year 0. She lived in the home as her primary residence until July 1 of year 4 when she sold the home for $675,000. If Alison's marginal ordinary tax rate is 25% what amount of tax will Alison pay on the $275,000 gain?

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

In 2012, Jaspreet purchased a new home for $500,000 by making a down payment of $400,000 and financing the remaining $100,000 with a loan, secured by the residence, at 6 percent. In 2014, Jaspreet made interest only payments of $6,000 on the $100,000 loan. On January 1, 2014, when his home was valued at $500,000 Jaspreet executed two home equity loans (both secured by the home) . The first was for $80,000 at an interest rate of 9 percent. The second home equity loan from a different bank was for $40,000 at an interest rate of 7 percent. In 2014, Jaspreet paid $7,200 of interest payments on the first home equity loan and $2,800 interest expense on the second. Jaspreet used the proceeds from the home-equity loans for purposes unrelated to the home. What is the maximum amount of interest expense Jaspreet can deduct on these loans as home related interest expense?

Amanda purchased a home for $1,000,000 in 2003 She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in 2014 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing. What is her total amount of qualifying home-related debt for tax purposes?

What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?

Lebron Taylor purchased a home on July 1, 2013 for $500,000. Lebron paid for the entire purchase price with cash. In July of 2013, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During 2014, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2014?

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 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.

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.

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 funds in the escrow account to pay the 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)?

Jessica purchased a home on January 1, 2013 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 2013 and 2014, Jessica made interest-only payments on the loan of $18,000 (each year) . On July 1, 2013, when her home was worth $500,000 Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2013, she made interest-only payments on this loan in the amount of $5,000. During 2014, she made interest only payments in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2014 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home, landscape the yard, and add a home theater room in the basement of the home?

Which of the following statements regarding interest expense on home-related debt is correct?

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.

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.