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Exam 14: Tax Consequences of Home Ownership

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Question 41

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Amelia is looking to refinance her home loan of $200,000. She has the option of (1) paying nodiscount 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 a30-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)?

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2.61 years...

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Question 42

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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.

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B) False

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Question 43

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The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

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.

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.

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

For regular tax purposes, a taxpayer may deduct interest expense on qualifying homeequity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home.

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

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

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

In terms of allocating expenses between rental use and personal use, the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

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?

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.

Leticia purchased a home on July 1, year 1 for $200,000. She paid $180,000 down and financed the remaining $20,000. On January 1, year 3 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 purposesunrelated to her home. During year 5, Leticia made interest-only payments of $15,000 on the loan. What amount of the $15,000 interest expense is Leticia allowed to deduct in year 5?

Michael (single) purchased his home on July 1, 2007. On July 1, 2015 he moved out of the home. He rented out the home until July 1, 2016 when he moved back into the home. On July 1, 2017 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2017 gross income?

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.

Lebron Taylor purchased a home on July 1, year 1 for $500,000. Lebron paid for the entire purchase price with cash. In July of year 1, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During year 2, he made interest only payments of$4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in year 2?

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

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 because he was changing 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 February 1, 2017 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 2017 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?