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Exam 14: Tax Consequences of Home Ownership

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Question 31

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

A) True
B) False

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Question 32

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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.

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

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Question 33

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

Darren (single)purchased a home on January 1,2013 for $400,000.Darren lived in the home as his primary residence until January 1,2015 when he began using the home as a vacation home.He used the home as a vacation home until January 1 2016 (he used a different home as his primary residence from January 1,2015 to January 1,2016).On January 1,2016,Darren moved back into the home and used it as his primary residence until January 1,2017 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 2017?

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?

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?

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)?

In order to be eligible to exclude gain on the sale of a principal residence,the taxpayer must meet which of the following test(s) ?

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.

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?

Amanda purchased a home for $1,000,000 in year 1.She paid $200,000 cash and borrowed the remaining $800,000.This is Amanda's only residence.Assume that in year 10 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,paid off the first mortgage,and used the remainder for purposes unrelated to the home.What is her total amount of qualifying home-related debt for tax purposes?

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.

Dawn (single) purchased her home on July 1,2008.On July 1,2016 Dawn moved out of the home.She rented out the home until July 1,2017 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 2017 gross income?

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.

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

On April 1,year 1,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 year 1 for her points paid?

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

In year 1,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 year 3,Gabby made interest-only payments of $18,000 on the $300,000 loan.On January 1,year 3,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 (later in the day) was for $40,000 at an interest rate of 9 percent.In year 3,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?

Patricia purchased a home on January 1,year 1 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 year 1,Patricia made interest-only payments on the loan of $66,000.What amount of the $66,000 interest expense Patricia paid during year 1 may she deduct as an itemized deduction?

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.