Chapter 14Student: ___________________________________________________________________________

1. In general terms, the tax laws favor taxpayers who own a principal residence relative to those who rent a principal residence.   True    False

 2. Renting a residence may have nontax advantages over owning a home.   

True    False 3. A personal residence is not a capital asset.   

True    False 4. A taxpayer may be required to pay tax on a gain the taxpayer realizes when she sells her principal

residence.   True    False

 5. For tax purposes a dwelling unit is a residence if the taxpayer's number of personal use days of the unit is

more than ten days.   True    False

 6. 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.   True    False

 7. 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 personal use.   True    False

 8. Taxpayers meeting certain requirements may be allowed to exclude at least a portion of gain realized on

the sale of a principal residence.   True    False

 9. The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have

owned the property for three or more years during the five year period ending on the date of sale.   True    False

 10. 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.   True    False

 11. To be allowed to exclude gain on the sale of a principal residence, the taxpayer selling the home must be

using the home as a principal residence at the time of the sale.   True    False

 12. 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.   True    False

 13. A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the

sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.   True    False

 

14. A taxpayer can qualify for the home sale exclusion even if she has moved out of the home and is renting the home to another at the time of the sale.   True    False

 15. A taxpayer who sells a principal residence that has been used (or is being used) as a rental property

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.   True    False

 16. At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years

no matter the circumstances.   True    False

 17. In certain circumstances, a taxpayer who does not meet the ownership and use test may still be allowed to

exclude the entire realized gain on the sale of a principal residence.   True    False

 18. The tax laws place a fixed dollar limit on the amount of qualified residence interest a taxpayer may

deduct in a particular year.   True    False

 19. A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for

at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home.   True    False

 20. Jacoby purchases a home for $1,500,000 by making a $150,000 down payment and by borrowing

the remaining $1,350,000 with a loan secured by the home. Jacoby can deduct interest expense on $1,100,000 of the loan principal.   True    False

 21. For regular tax purposes, a taxpayer may deduct interest expense on qualifying home equity indebtedness

even if the taxpayer uses the loan proceeds for a purpose other than to improve the home.   True    False

 22. Taxpayers with high AGI are not allowed to deduct interest on qualifying home equity indebtedness.   

True    False 23. 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.   True    False

 24. 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.   True    False

 25. The longer a taxpayer plans on living in a home without refinancing, the more likely it is that paying

points to receive a reduced interest rate on the loan makes economic sense.   True    False

 26. A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that

property for the entire year.   True    False

 27. Taxpayers are allowed to deduct real property taxes at the time they pay estimated taxes to an escrow

account established by the lender for the taxpayer's property taxes.   True    False

 

28. 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.   True    False

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

the income.   True    False

 30. 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 the rental use.   True    False

 31. When allocating expenses of a vacation home between personal use and rental use, the amount of

depreciation expense allocated to the rental use is always the ratio of rental days over rental days plus personal use days.   True    False

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

True    False 33. Compared to the Tax Court method of allocating expenses between rental use and personal use, the IRS

method tends to allocate more expenses to personal use than does the Tax Court method.   True    False

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

True    False 35. 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.   True    False

 36. 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.   True    False

 37. A tax loss from a rental home is a passive activity loss.   

True    False 38. A self-employed taxpayer reports home office expenses as for AGI deductions while employees report

home office expenses as from AGI deductions.   True    False

 39. Taxpayers with home offices must allocate indirect expenses of the home between personal use and home

office use. Only expenses allocated to the home office use are deductible.   True    False

 40. In general, total deductible home office expenses are limited to the gross income derived from the

business minus business expenses unrelated to the home. (this is net Schedule C income before home office expenses).   True    False

 41. Serena is single. She purchased her principal residence three years ago. She lived in the home until she

sold it at a $300,000 gain this year. Serena was allowed to exclude $250,000 of the $300,000 gain. What is the character of the $50,000 gain she was not able to exclude?   A. Ordinary income/gainB. Short-term capital gainC. Long-term capital gainD. Personal gainE. None of these

 

42. In order to be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet which of the following tests?   A. Rental testB. Use testC. Ownership testD. Business use testE. Use test and Ownership test

 43. Which of the following statements regarding a taxpayer's principal residence is true for purposes of

determining whether the taxpayer is eligible to exclude gain realized on the sale of the residence?   A. A taxpayer may have more than one principal residence at any one time.B. A taxpayer's principal residence may not be a houseboat.C. 

A taxpayer with more than one residence may annually elect which residence is considered to be the principal residence.

D. None of these statements is true. 44. Which of the following statements regarding the exclusion of gain on the sale of a principal residence is

correct?   A. A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale.B. A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.C. A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion.D. 

For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.

 45. 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?   A. $0B. $250,000C. $500,000D. $600,000

 46. Shantel owned and lived in a home for five years before marrying Daron. Shantel and Daron lived in the

home for two years before selling it at a $700,000 gain. Shantel was the sole owner of the residence until it was sold. How much of the gain may Shantel and Daron exclude?   A. $0B. $250,000C. $500,000D. $700,000

 47. On February 1, 2012 Stephen (who is single) sold his principal residence (home 1) at a $100,000 gain. He

was able to exclude the entire gain on his 2012 tax return. Stephen purchased and moved into home 2 on the same day. Assuming Stephen lives in home 2 as his principal residence until he sells it, which of the following statements is true?   A. Under no circumstance will Stephen be allowed to exclude gain on home 2 if he sells home 2 in 2013.B. Stephen will be eligible to exclude gain on home 2 only if he waits until 2017 to sell it.C. 

In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2012.

D. None of these is a true statement. 48. On November 1, 2012, Jamie (who is single) purchased and moved into her principal residence. In early

2013, Jamie was laid off from her job. On February 1, 2013, 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 2013?   A. $0B. $3,125C. $31,250D. $35,000

 

49. Cameron (single) purchased and moved into his principal residence on July 1, 2012. On June 1, 2013, Cameron lost his job. Because he couldn't afford the payments on his new home, he sold it on July 1, 2013 in order to move into some apartments across the street. On the sale of his principal residence, Cameron realized a $50,000 gain. How much of the gain is Cameron allowed to exclude from his 2013 gross income?   A. $0B. $2,500C. $25,000D. $50,000

 50. Dawn (single) purchased her home on July 1, 2003. On July 1, 2011 Dawn moved out of the home. She

rented out the home until July 1, 2012 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 2012 gross income?   A. $0B. $207,000C. $225,000D. $230,000

 51. Michael (single) purchased his home on July 1, 2002. On July 1, 2010 he moved out of the home. He

rented out the home until July 1, 2011 when he moved back into the home. On July 1, 2012 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2012 gross income?   A. $0B. $225,000C. $250,000D. $300,000

 52. Ethan (single) purchased his home on July 1, 2003. On July 1, 2010 he moved out of the home. He rented

the home until July 1, 2012 when he moved back into the home. On July 1, 2013 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2013 gross income?   A. $0B. $168,000C. $200,000D. $210,000

 53. What is the maximum amount of gain on the sale of principal residence a married couple may exclude

from gross income?   A. $0B. $25,000C. $250,000D. $500,000

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

A. 

If a taxpayer converts a home from personal use to rental use, the basis of the rental property is the greater of the basis of the property at the time of the conversion or the fair market value of the property at the time of the conversion.

B. 

If a taxpayer uses a residence as a rental property (and deducts depreciation expense against the basis of the property) and as a personal residence the taxpayer will not be allowed to exclude the entire amount of gain even if the taxpayer otherwise meets the ownership and use tests and the amount of the gain is less than the limit on excludable gain.

C. 

If a taxpayer converts a rental home to a principal residence, the taxpayer's basis in the principal residence is the greater of the basis of the home at the time of the conversion or the fair market value at the time of the conversion.

D. None of these statements is correct. 

55. 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   A. Personal use of the home exceeds the taxpayer's rental use of the home.B. Personal use of the home exceeds half of the taxpayer's rental use of the home.C. 

Personal use of the home exceeds the lesser of 14 days or 10 percent of the taxpayer's rental use of the home.

D. 

Personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.

 56. Which of the following best describes a qualified residence for purposes of determining a taxpayer's

deductible home mortgage interest expense?   A. Only the taxpayer's principal residence.B. The taxpayer's principal residence and two other residences (chosen by the taxpayer).C. The taxpayer's principal residence and one other residence (chosen by the taxpayer).D. Any two residences chosen by the taxpayer.

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

A. 

Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.

B. 

Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.

C. 

Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited amount of home equity indebtedness.

D. None of these statements is correct. 58. Patrick purchased a home on January 1, 2012 for $500,000 by making a down payment of $100,000 and

financing the remaining $400,000 with a 30-year loan, secured by the residence, at 6 percent. During 2012 Patrick made interest-only payments on the loan of $30,000. On July 1, 2012, when his home was worth $500,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent. During 2012, 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 2012 may he deduct as an itemized deduction?   A. $0B. $3,000C. $30,000D. $33,000

 59. Patricia purchased a home on January 1, 2012 for $1,200,000 by making a down payment of $100,000

and financing the remaining $1,100,000 with a 30-year loan, secured by the residence, at 6 percent. During 2012, Patricia made interest-only payments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during 2012 may she deduct as an itemized deduction?   A. $0B. $6,000C. $60,000D. $66,000

 

60. Lauren 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. During 2012, Lauren made interest-only payments on the loan. On July 1, 2012, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2012, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies)?   A. 

Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan unless she uses the loan proceeds to substantially improve the home.

B. 

Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan no matter what she does with the proceeds of the second loan.

C. Lauren may deduct all of the interest on the first loan or all of the interest on the second loan.D. 

Lauren may deduct all of the interest on the first loan and all of the interest on the second loan no matter what she does with the loan proceeds.

 61. Kimberly purchased a home on January 1, 2011 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 2011 and 2012 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2011, 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 2011, she made interest-only payments on this loan in the amount of $2,500 and during 2012, she made interest only payments on the loan in the amount of $5,000. What is the maximum amount of the $23,000 interest expense Kimberly paid during 2012 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?   A. $0B. $5,000C. $18,000D. $21,647E. $22,000

 62. Jessica purchased a home on January 1, 2011 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 2011 and 2012, Jessica made interest-only payments on the loan of $18,000 (each year). On July 1, 2011, 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 2011, she made interest-only payments on this loan in the amount of $5,000. During 2012, 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 2012 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?   A. $0B. $10,000C. $26,353D. $26,000E. $28,000

 63. Two years ago, 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 2012, Jaspreet made interest only payments of $6,000 on the $100,000 loan. On January 1, 2012, 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 2012, 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?   A. $6,000B. $14,545C. $14,600D. $16,000

 

64. Two years ago, 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 2012, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, 2012, 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 2012, 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. $18,000B. $25,400C. $25,905D. $27,200

 65. Three years ago, Abby purchased a new home for $200,000 by making a down payment of $150,000

and financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, 2012, the outstanding balance on the loan was $40,000. On January 1, 2012, when her home was worth $300,000, Abby refinanced the home by taking out a $120,000 mortgage at 5 percent. With the loan proceeds, she paid off the $40,000 balance of the existing mortgage and used the remaining $80,000 for purposes unrelated to the home. During 2012, she made interest-only payments on the new loan of $6,000. What amount of the $6,000 interest expense on the new loan can Abby deduct in 2012 on the new mortgage as home related interest expense?   A. $0B. $2,000C. $5,000D. $6,000

 66. Three years ago, Kris purchased a new home for $200,000 by making a down payment of $150,000 and

financing the remaining $50,000 with a loan, secured by the residence, at 6 percent. As of January 1, 2012, the outstanding balance on the loan was $40,000. On January 1, 2012, when his home was worth $300,000, Kris refinanced the home by taking out a $150,000 mortgage at 5 percent. With the loan proceeds, he paid off the $40,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During 2012, he made interest only payments on the new loan of $7,500. What amount of the $7,500 interest expense on the new loan can Kris deduct in 2012 on the new mortgage as home related interest expense?   A. $2,000B. $5,000C. $7,000D. $7,500

 67. Which of the following statements regarding qualified home equity indebtedness is correct?   

A. The limit on qualified home equity indebtedness depends on filing status.B. 

Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.

C. 

If the value of a home drops, the amount of qualified home equity indebtedness on an existing home equity loan also drops.

D. 

In order to deduct interest on home equity indebtedness, taxpayers must use the proceeds of a home equity loan to improve the home.

 68. Amanda purchased a home for $1,000,000 in 2001 She paid $200,000 cash and borrowed the remaining

$800,000. This is Amanda's only residence. Assume that in 2012 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?   A. $600,000B. $700,000C. $1,000,000D. $1,100,000

 

69. On March 31, 2012, 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 2012 deduction for her points paid?   A. $50B. $150C. $4,500D. $6,000

 70. Which of the following statements regarding the tax deductibility of points related to a home mortgage is

correct?   A. 

Points paid in the form of a loan origination fee on an original home loan are deductible over the life of the loan.

B. 

Points paid in the form of prepaid interest on an original home loan are deductible over the life of the loan.

C. Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.D. None of these statements is correct.

 71. 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. 72. On March 31, 2012, Mary borrowed $200,000 to refinance the original mortgage on 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. How much can Mary deduct in 2012 for her points paid?   A. $200B. $150C. $4,500D. $6,000

 73. Which of the following statements regarding deductions for real property taxes is incorrect?   

A. 

A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.

B. Taxpayers are not allowed to deduct payments made for setting up water and sewer services.C. An individual deducts real property taxes on her principal residence as a for AGI deduction.D. Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.

 74. Which of the following statements best describes the deductibility of real property taxes when a taxpayer

sells real property during a year?   A. 

The owner of the property at the time the property taxes are due is responsible for paying all of the real property taxes on the property for the year. Consequently, this person is allowed to deduct all of the property taxes for the year.

B. Taxpayers are allowed to deduct the real property taxes they actually pay for the year.C. 

Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property.

D. None of these statements is correct. 

75. On July 1 of 2012, 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, 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 2012?   A. $0B. $4,000C. $4,500D. $5,000E. $9,000

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

A. 

Taxpayers who acquired a home in 2009 and claimed the credit are required to pay the credit back if they live in the home for less than 15 years.

B. 

Taxpayers who acquired a home in 2010 and claimed the credit are required to pay the credit back if they live in the home for less than 5 years.

C. The credit is a fully refundable credit.D. None of these.

 77. Which of the following statements regarding personal and/or rental use of a home is false?   

A. 

A day for which a taxpayer rents a home to an unrelated party for less than the property's fair market value is considered to be a personal use day.

B. 

A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day.

C. 

A day for which an unrelated non-owner stays in the home under a vacation exchange arrangement is considered to be a personal use day.

D. 

A day for which the home is available for rent but is not occupied does not count as a personal use or a rental use day.

 78. Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski

resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?   A. Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI.B. Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI.C. 

Kenneth would include the rental receipts in gross income and would not deduct the rental expenses because he used the residence for personal purposes for most of the year.

D. Kenneth would exclude the rental receipts, and he would not deduct the rental expenses. 79. Katy owns a second home. During 2012, she used the home for 20 personal use days and 50 rental days.

Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home?   A. 

Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.

B. 

Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.

C. 

Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy's deductible expenses for 2012 may not exceed the amount of her rental receipts (she may not report a loss from the rental property).

D. All of these statements are correct. 

80. 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?   A. 

The Tax Court approach allocates more property tax and interest expense to rental use than does the IRS approach.

B. 

The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use.

C. 

The IRS approach allocates interest expense and property taxes to rental use based on the ratio of the number of days of rental use to the total days of the year.

D. None of these statements is correct. 81. 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?   A. $0 net income. $1,000 depreciation expense carried forward to next year.B.  ($1,000) net loss. $0 expenses carried over to next year.C. $0 net income. $1,000 of other expense carried over to next year.D. $0 net income. $1,000 of interest expense and property taxes carried over to next year.

 82. Braxton 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. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?   A. Depreciation expense, other expenses, property taxes and interest expense.B. Other expenses, depreciation expense, property taxes and interest expense.C. Property taxes and interest expense, depreciation expense, other expenses.D. Other expenses, property taxes and interest expense, depreciation expense.E. None of these statements is correct.

 83. Harriet owns a second home that she rents to others. During the year, she used the second home for 10

personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?   A. Harriet's deductible expenses are not limited to the amount of gross rental income from the property.B. Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.C. Harriet is required to include all of the rental receipts in gross income.D. Harriet is required to allocate all expenses associated with the home to rental use or personal use.

 84. For a home to be considered a rental (nonresidence) property, a taxpayer must   

A. Rent the property for 15 days or more during the year.B. 

Use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

C. 

Use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

D. A and B.E. A and C.

 85. 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 limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

 

86. Harvey rents his second home. During 2012, 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 in 2012?   A. $35,000B. $25,000C. $5,000D. $0

 87. Ilene rents her second home. During 2012, Ilene reported a net loss of $15,000 from the rental. If Ilene is

an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in 2012?   A. $15,000B. $10,000C. $5,000D. $0

 88. Jamison is self-employed and he works out of an office in his home. After allocating the home-related

expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct?   A. Depreciation expense, other expenses, property taxes and interest expense.B. Other expenses, depreciation expense, property taxes and interest expense.C. Property taxes and interest expense, depreciation expense, other expenses.D. Other expenses, property taxes and interest expense, depreciation expense.E. None of these statements is correct.

 89. Which of the following statements regarding limitations on the deductibility of home office expenses of

employees is correct?   A. 

Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

B. 

Deductible home office expenses of employees are miscellaneous itemized deductions not subject to the 2 percent floor.

C. 

Deductible home office expenses of employees are for AGI deductions limited to gross income from the business.

D. 

Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business.

 90. Which of the following statements regarding limitations on the deductibility of home office expenses of

self-employed taxpayers is correct?   A. 

Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

B. 

Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor.

C. 

Deductible home office expenses are for AGI deductions limited to gross income from the business minus non home office related expenses.

D. Deductible home office expenses are for AGI deductions and may be deducted without limitation. 91. Which of the following statements regarding the home office expense deduction is correct?   

A. 

Taxpayers allocate expenses of the home to the home office based on the size of the office relative to the size of the home.

B. 

A taxpayer is not allowed to deduct any home office expenses unless the taxpayer has no other place to do business.

C. A taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense.D. A taxpayer must own a home in order to claim home office expenses.

 

92. 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?   

 

 

 

 93. 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 was changing jobs and his new job was in a different state. What amount of gain must Nelson recognize on the home sale in year 2?   

 

 

 

 94. Andrew Whiting (single) purchased a home in Boise, Idaho for $300,000. He moved into the home on

July 1 of year 1. He lived in the home as his primary residence until November 1, year 2 when he sold the home for $470,000. Andrew sold the home because he was changing jobs and his new job was in a different state. What amount of gain must Andrew recognize on the home sale in year 2?   

 

 

 

 95. Darren (single) purchased a home on January 1, 2008 for $400,000. Darren lived in the home as his

primary residence until July 1, 2010 when he began using the home as a vacation home. He used the home as a vacation home until July 1, 2011 (he used a different home as his primary residence from July 1, 2010 to July 1, 2011). On July 1, 2011, Darren moved back into the home and used it as his primary residence until July 1, 2012 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 2012?   

 

 

 

 

96. Heidi (single) purchased a home on January 1, 2003 for $400,000. She lived in the home as her primary residence until January 1, 2010 when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2011 (she used a different home as her primary residence from January 1, 2010 to January 1, 2011). On January 1, 2011, Heidi moved back into the home and used it as her primary residence until January 1, 2013 when she sold the home for $700,000. What amount of the $300,000 gain Heidi realized on the sale must she recognize for tax purposes in 2013?   

 

 

 

 97. 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?   

 

 

 

 98. Rafael and Sandra Gonzalez purchased a home on January 1 of year 1 for $400,000 by paying $40,000

down and borrowing the remaining $360,000 with a 6 percent loan secured by the home. The loan requires interest-only payments for the first five years. In year 2, when the home was valued at $400,000, Rafael and Sandra took out a second loan secured by the home for $80,000 to fund expenses unrelated to the home. The interest rate on the second loan is 8 percent. In year 2, Rafael and Sandra paid $24,000 of interest expense on the first loan and $6,400 of interest on the second loan. What is the maximum amount of the $30,400 of interest expense may Rafael and Sandra deduct in year 2?   

 

 

 

 

99. Lebron Taylor purchased a home on July 1, 2011 for $500,000. Lebron paid for the entire purchase price with cash. In July of 2011, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During 2012, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2012?   

 

 

 

 100.Leticia purchased a home on July 1, 2008 for $200,000. She paid $180,000 down and financed the

remaining $20,000. On January 1, 2010 when the outstanding balance of her mortgage was $15,000 and her home was valued at $300,000, Leticia refinanced her home for $200,000. With the $200,000 loan, she paid off the remaining $15,000 balance of her original mortgage, she used $35,000 to substantially improve her home and she used the remaining $150,000 for purposes unrelated to her home. During 2012, Leticia made interest-only payments of $15,000 on the loan. What amount of the $15,000 interest expense is Leticia allowed to deduct?   

 

 

 

 101.Robin purchased a home on July 1, 2007 for $300,000. She paid $200,000 down and financed the

remaining $100,000. On January 1, 2012 when the outstanding balance of her mortgage was $85,000 and her home was valued at $300,000, she refinanced her home for $250,000. With the $250,000 loan, she paid off the remaining $85,000 balance of her original mortgage, she used $70,000 to substantially improve her home and she used the remaining $95,000 for purposes unrelated to her home. During 2012, Robin made interest only payments of $12,500 on the loan. What amount of the $12,500 interest expense is Robin allowed to deduct in 2012?   

 

 

 

 102.Jasper is looking to purchase a new home for $250,000. He is paying $50,000 as a down payment on the

home and financing the remaining $200,000 with a loan secured by the home. He has the option of (1) paying no discount points on the loan and paying interest at 6.5 percent or (2) paying one discount point on the loan and paying interest of 5.5 percent on the loan. Both options require Jasper to make interest-only payments for the first five years of the loan and to pay the loan principal over the 25 years after that (it is a 30-year loan). Jasper itemizes deductions irrespective of any interest expense he may pay. Jasper's marginal ordinary income tax rate is 28 percent. What is Jasper's break-even point in years (for simplicity, ignore time value of money concerns)?   

 

 

 

 

103.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 two 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 25 percent. What is Amelia's break-even point in years (for simplicity, ignore time value of money concerns)?   

 

 

 

 104.Jason and Alicia Johnston purchased a home in Austin, Texas for $500,000. They moved into the home

on September 1, year 0. They lived in the home as their primary residence until July 1 of year 5 when they sold the home for $800,000. What amount of the $300,000 gain are they allowed to exclude?   

 

 

 

 105.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 x 1% x 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)?   

 

 

 

 

106.Kristen rented out her home for 10 days during the year for $5,000. She used the home for personal purposes for the other 355 days. She allocated the following home expenses to the rental use of the home:

   Kristen's AGI is $120,000 before considering the effect of the rental activity. What is Kristen's AGI after considering the tax effect of the rental use of her home?   

 

 

 

 107.Careen owns a condominium near Newport Beach in California. This year, she incurs the following

expenses in connection with her condo:

   During the year, Careen rented the condo for 90 days, receiving $20,000 of gross income. She personally used the condo for 50 days. Assuming Careen uses the IRS method of allocating expenses to rental use of the property. What is Careen's net rental income for the year?   

 

 

 

 

108.Tyson owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo:

   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?   

 

 

 

 109.Rayleen owns a condominium near Orlando, Florida. This year, she incurs the following expenses in

connection with her condo:

   During the year, Rayleen rented the condo for 130 days and she received $25,000 of rental receipts. She did not use the condo at all for personal purposes during the year. Rayleen is considered to be an active participant in the property. Rayleen's AGI from all sources other than the rental property is $130,000. Rayleen does not have passive income from any other sources. What is Rayleen's AGI?   

 

 

 

 

110.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?   

 

 

 

 111.Don owns a condominium near Orlando, California. This year, he incurs the following expenses in

connection with his condo:

   During the year, Don rented the condo for 70 days and he received $17,400 of rental receipts. He did not use the condo at all for personal purposes during the year. Don is considered to be an active participant in the property. Don's AGI from all sources other than the rental property is $140,000. Don does not have passive income from any other sources. What is Don's AGI?   

 

 

 

 

112.Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 400 square feet. The size of her entire home is 2,400 square feet. During the year, Mercury received $6,300 of gross income from her business activities and she reported $2,500 of business expenses unrelated to her home office. For her entire home in the current year, she reported $3,500 of mortgage interest, $1,000 of property taxes, $600 of insurance, $500 of utilities and other operating expenses, and $3,200 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in 2012? Indicate the amount and type of expenses she must carry over to the next year, if any.   

 

 

 

 113.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? Indicate the amount and type of expenses he must carry over to next year, if any.   

 

 

 

 

Chapter 14 Key  1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. FALSE 6. FALSE 7. FALSE 8. TRUE 9. FALSE 10. TRUE 11. FALSE 12. TRUE 13. FALSE 14. TRUE 15. TRUE 16. FALSE 17. TRUE 18. FALSE 19. TRUE 20. TRUE 21. TRUE 22. FALSE 23. FALSE 24. FALSE 25. TRUE 26. FALSE 27. FALSE 28. TRUE 29. TRUE 30. TRUE 31. TRUE 32. TRUE 33. FALSE 34. TRUE 35. FALSE 36. TRUE 

37. TRUE 38. TRUE 39. TRUE 40. TRUE 41. C 42. E 43. D 44. B 45. B 46. C 47. C 48. C 49. A 50. D 51. C 52. B 53. D 54. B 55. D 56. C 57. C 58. D 59. D 60. A 61. E 62. E 63. C 64. C 65. D 66. C 67. A 68. B 69. D 70. C 71. C 72. B 73. C 74. C 

75. C 76. C 77. B 78. D 79. D 80. B 81. A 82. E 83. B 84. D 85. D 86. B 87. C 88. E 89. A 90. C 91. A Feedback: $275,000 gain minus $250,000 exclusion = $25,000 long term capital gain × 15% = $3,750 tax.92. $3,750 tax.

 Feedback: $150,000 gain realized minus $150,000 exclusion. Nelson is single and the full exclusion for single taxpayers is $250,000. Because he is selling the home due to hardship circumstances, he is allowed to exclude a maximum of $250,000 × 17/24 = $177,083. Because his gain is less than the maximum exclusion, he does not recognize gain.93. $0 gain recognized.

 Feedback: $170,000 gain realized minus $166,667 exclusion. Under the hardship circumstances test, Andrew is allowed to exclude $250,000 × 16/24 = $166,667.94. $3,333 gain recognized.

 Feedback: Post 2008 nonqualified use is 1 year (July 1, 2010 - July 1, 2011). Total ownership is 4.5 years. So, total gain not excludable is $100,000 × 1/4.5 = $22,222.95. $22,222 gain recognized.

 Feedback: Post 2008 nonqualified use is one year. She owned the property for 10 years so she is not allowed to exclude $30,000 of the gain ($300,000 × 10%) meaning she is allowed to exclude $270,000 before the maximum exclusion limitation. Since the maximum exclusion is $250,000 for a single taxpayer, she may exclude $250,000 meaning she must recognized $50,000 of gain.96. $50,000 gain recognized.

 Feedback: Personal (14 + 8 + 5 + 3), Rental (6 + 42 + 3).97. 30 days personal; 51 days rental.

 

Feedback: $30,400 × 400,000/440,000. Average method generates more income because the second loan has a higher rate than the first loan. Note that only $40,000 of the second loan is qualifying debt because this is the portion secured by the equity in the home (the total qualifying debt is limited to the fair market value of the property).98. $27,636.

 Feedback: $4,500 × 100,000/150,000. All debt is home equity debt. There is no acquisition indebtedness.99. $3,000.

 Feedback: $15,000 × [(100,000 + 50,000)/200,000].100. $11,250.

 Feedback: All debt is qualifying debt. The loan used to improve her home increases acquisition indebtedness.101. $12,500.

 

   Feedback: See computation below.102. One year.

 

   Feedback: See computation below.103. 2.61 years.

 Feedback: They qualify to exclude up to $500,000 of gain.104. $300,000.

 Feedback: They did not live in the property during the tax year ending on July 1, year 1 but they lived in the property for 9 of the 12 months during the tax year ending on July 1, year 2. They can deduct the taxes associated with these nine months when the taxes are paid in year 2.105. $0 in year 1; $3,000 in year 2.

 Feedback: She ignores the income and the expenses.106. $120,000.

 

   Feedback: See calculations below.107. $5,633.

 

   Feedback: See calculations below.108. $16,317.

 

   Feedback: $130,000 + 2,550.109. $132, 550.

 

   Feedback: $120,000 + (400).110. $119,600.

 

Because Don is an active participant in the property, he is allowed to deduct ($5,000) of the passive loss this year [$25,000 active participant maximum less $25,000 × (140,000 - 100,000)/50,000].

   Feedback: $140,000 + (5,000).111. $135,000.

 

   Feedback: See computation below.112. $1,466, no carry over.

 

   Alfredo reports $2,500 of income before deducting home office expenses. His expenses reduce his net business income to $0, but he must carryover $400 of home operating expenses and all $900 of depreciation expenses.Feedback: See computation and discussion below.113. Alfredo is allowed to deduct $2,500 of home office expenses. He must carryover, $400 of home operating expenses and $900 of depreciation expense.

 

Chapter 14 Summary  Category # of Questions

AACSB: Reflective thinking 113

AICPA BB: Critical thinking 113

Blooms: Analyze 24

Blooms: Apply 60

Blooms: Remember 29

Learning Objective: 14-01 Determine whether a home is considered a principal residence; a residence (not principal); or a nonresidence for tax purposes.

8

Learning Objective: 14-02 Compute the taxable gain on the sale of a residence and explain the requirements for excluding gain on the sale.

31

Learning Objective: 14-03 Determine the amount of allowable interest expense deductions on loans secured by a residence. 33

Learning Objective: 14-04 Discuss the deductibility of real property taxes and describe the first-time home buyer credit. 8

Learning Objective: 14-05 Explain the tax issues and consequences associated with rental use of the home; including determining the deductibility of residential rental real estate losses.

26

Learning Objective: 14-06 Describe the requirements necessary to qualify for home office deductions and compute the deduction limitations on home office deductions.

9

Level of Difficulty: 1 Easy 43

Level of Difficulty: 2 Medium 62

Level of Difficulty: 3 Hard 8

Spilker - Chapter 14 113