Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap014

Chapter 14
Tax Consequences of Home Ownership
True / False Questions
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

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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 tests
may still be allowed to exclude the entire realized gain on the sale of a principal
residence.
True

False

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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
unrelated to the home.
True

False

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

indebtedness.
True

False

23. Depending on AGI, taxpayers may be able to deduct mortgage insurance premiums
as a for AGI deduction.
True

False

24. 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

25. 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

26. 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

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27. 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.
True

False

28. 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.
True

False

29. 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

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

True

False

31. 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.
True

False

32. 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.
True

False

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

False

34. In terms 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

35. Taxpayers renting a home would generally report the rental income and expenses on

Schedule E.
True

False

36. 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

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37. 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

38. A tax loss from a rental home is a passive activity loss.
True

False

39. A self-employed taxpayer reports home office expenses as for AGI deductions while

employees report home office expenses as from AGI deductions.
True

False

40. Taxpayers with home offices and who use the actual expense method for computing
home office expenses must allocate indirect expenses of the home between personal
use and home office use. Only expenses allocated to the home office use are
deductible for AGI.
True

False

41. In general, total deductible home office expenses are limited to the gross income
derived from the business minus business expenses unrelated to the home (that is,
they are limited to net Schedule C income before home office expenses).
True

False

42. Taxpayers using the simplified method for computing home office expenses do not
deduct depreciation expense for the home office use.
True

False

Multiple Choice Questions
43. 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.
B.
C.
D.
E.

Ordinary income/gain
Short-term capital gain
Long-term capital gain

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44. 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.
B.
C.
D.
E.
45. 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.

B.
C.
D.

A taxpayer may have more than one principal residence at any one time.
A taxpayer's principal residence may not be a houseboat.
A taxpayer with more than one residence may annually elect which residence is c
None of these statements is true.

46. Which of the following statements regarding the exclusion of gain on the sale of a
principal residence is correct?

A.
B.
C.
D.

A taxpayer may not exclude gain if the taxpayer is renting the residence at the tim
A taxpayer may simultaneously own two homes that are eligible for the home sale
A taxpayer must be living in a residence at the time it is sold to qualify for the e
For a married couple to qualify for the $500,000 exclusion, both spouses must me

47. 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.
B.
C.

D.
48. 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.
B.
C.
D.

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49. On February 1, 2014 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 2014 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.
B.
C.
D.

Under no circumstance will Stephen be allowed to exclude gain on home 2 if he se
Stephen will be eligible to exclude gain on home 2 only if he waits until 2019 to
In certain circumstances, Stephen may be able to exclude gain on home 2 even if

None of these is a true statement.

50. On November 1, 2014, Jamie (who is single) purchased and moved into her principal
residence. In early 2015, Jamie was laid off from her job. On February 1, 2015, 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 2015?

A.
B.
C.
D.
51. Cameron (single) purchased and moved into his principal residence on July 1, 2014.
On June 1, 2015, Cameron lost his job. Because he couldn't afford the payments on
his new home, he sold it on July 1, 2015 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 2015 gross
income?

A.
B.
C.
D.
52. Dawn (single) purchased her home on July 1, 2005. On July 1, 2013 Dawn moved out
of the home. She rented out the home until July 1, 2014 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 2014 gross income?

A.
B.

C.
D.

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53. Michael (single) purchased his home on July 1, 2004. On July 1, 2012 he moved out of
the home. He rented out the home until July 1, 2013 when he moved back into the
home. On July 1, 2014 he sold the home and realized a $300,000 gain. What amount
of the gain is Michael allowed to exclude from his 2014 gross income?

A.
B.
C.
D.
54. 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?

A.
B.
C.
D.
55. What is the maximum amount of gain on the sale of principal residence a married
couple may exclude from gross income?

A.

B.
C.
D.
56. Which of the following statements regarding home-related transactions is correct?

A.
B.
C.
D.

If a taxpayer converts a home from personal use to rental use, the basis of the ren
If a taxpayer uses a residence as a rental property (and deducts depreciation expe
If a taxpayer converts a rental home to a principal residence, the taxpayer's basis
None of these statements is correct.

57. 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.
B.
C.
D.

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

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58. Which of the following best describes a qualified residence for purposes of
determining a taxpayer's deductible home mortgage interest expense?

A.
B.
C.
D.

Only the taxpayer's principal residence.
The taxpayer's principal residence and two other residences (chosen by the taxp
The taxpayer's principal residence and one other residence (chosen by the taxp
Any two residences chosen by the taxpayer.

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

A.
B.
C.
D.

Taxpayers may deduct interest expense on a limited amount of home equity indeb
Taxpayers may deduct interest expense on a limited amount of acquisition indebte
Taxpayers may deduct interest expense on a limited amount of acquisition indebt
None of these statements is correct.

60. Patrick purchased a home on January 1, 2014 for $600,000 by making a down
payment of $100,000 and financing the remaining $500,000 with a 30-year loan,
secured by the residence, at 6 percent. During 2014 Patrick made interest-only
payments on the loan of $30,000. On July 1, 2014, when his home was worth
$600,000 Patrick borrowed an additional $75,000 secured by the home at an interest
rate of 8 percent. During 2014, 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
2014 may he deduct as an itemized deduction?

A.
B.
C.
D.
61. Patricia purchased a home on January 1, 2014 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 2014, Patricia made interest-only
payments on the loan of $66,000. What amount of the $66,000 interest expense
Patricia paid during 2014 may she deduct as an itemized deduction?

A.
B.
C.
D.

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62. Lauren purchased a home on January 1, 2014 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 2014, Lauren made interest-only payments on the
loan. On July 1, 2014, when her home was valued at $500,000, she borrowed an
additional $150,000, secured by the residence. During 2014, 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.
B.
C.
D.

Lauren may deduct all of the interest on the first loan but she may deduct only two
Lauren may deduct all of the interest on the first loan but she may deduct only two
Lauren may deduct all of the interest on the first loan or all of the interest on the
Lauren may deduct all of the interest on the first loan and all of the interest on th

63. Kimberly 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 Kimberly made
interest-only payments on the loan in the amount of $18,000 each year. On July 1,
2013, 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 2013, she
made interest-only payments on this loan in the amount of $5,000 and during 2014,
she made interest only payments on the loan in the amount of $10,000. What is the
maximum amount of the $28,000 interest expense Kimberly paid during 2014 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.
B.
C.
D.
E.
64. 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 interestonly 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?

A.
B.
C.
D.
E.

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65. 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?

A.
B.
C.
D.
66. 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.
B.
C.
D.
67. In 2011, 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, 2014, the outstanding balance on the loan was
$40,000. On January 1, 2014, 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 2014, 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 2014 on the new mortgage as home related interest
expense?

A.
B.
C.
D.

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68. In 2011, 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, 2014, the outstanding balance on the loan was
$40,000. On January 1, 2014, 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 2014, 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 2014 on the new mortgage as home related interest expense?

A.

B.
C.
D.
69. Which of the following statements regarding qualified home equity indebtedness is
correct?

A.
B.
C.
D.

The limit on qualified home equity indebtedness depends on filing status.
Limits on qualified home equity indebtedness and qualified acquisition indebtedne
If the value of a home drops, the amount of qualified home equity indebtedness o
In order to deduct interest on home equity indebtedness, taxpayers must use the

70. 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?

A.
B.
C.
D.
71. 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?

A.
B.
C.
D.

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

A.
B.
C.
D.

Points paid in the form of a loan origination fee on an original home loan are deduc
Points paid in the form of prepaid interest on an original home loan are deductible
Points paid in the form of prepaid interest on a refinance are deductible over the l
None of these statements is correct.

73. 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.
B.
C.

D.

All else equal, the break-even point for paying points on an original mortgage is lo
All else equal, the break-even point for paying points on an original mortgage is lo
All else equal, the break-even point for a taxpayer paying points on an original m
None of these statements is correct.

74. On March 31, 2014, 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 2014 for
her points paid?

A.
B.
C.
D.
75. Which of the following statements regarding deductions for real property taxes is
incorrect?

A.
B.
C.
D.

A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly
Taxpayers are not allowed to deduct payments made for setting up water and sew
An individual deducts real property taxes on her principal residence as a for AGI
Taxpayers are not allowed to deduct payments made for neighborhood sidewa

76. Which of the following statements best describes the deductibility of real property

taxes when a taxpayer sells real property during a year?

A.
B.
C.
D.

The owner of the property at the time the property taxes are due is responsible for
Taxpayers are allowed to deduct the real property taxes they actually pay for the
Taxpayers are allowed to deduct the property taxes allocated to the portion of the
None of these statements is correct.

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77. On July 1 of 2014, 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 2014?

A.
B.
C.

D.
E.
78. Which of the following statements regarding the first time home buyer credit is
correct?

A.
B.
C.
D.

Taxpayers who acquired a home in 2008 and claimed the credit is not required to p
Taxpayers who acquired a home in 2008 and claimed the credit are required to pa
Taxpayers who acquired a home in 2008 and claimed the credit are required to pa

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

A.
B.
C.
D.

A day for which a taxpayer rents a home to an unrelated party for less than the pr
A day for which a taxpayer rents a home to a relative for full fair market value is c
A day for which an unrelated non-owner stays in the home under a vacation exch
A day for which the home is available for rent but is not occupied does not count

80. 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.
B.
C.
D.

Kenneth would include the rental receipts in gross income and deduct the rental e
Kenneth would exclude the rental receipts from gross income and deduct the renta
Kenneth would include the rental receipts in gross income and would not deduct t
Kenneth would exclude the rental receipts, and he would not deduct the rental e

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81. Katy owns a second home. During 2014, 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.
B.
C.
D.

Katy includes the rental receipts in gross income and deducts the expenses alloca
Katy deducts from AGI interest expense and property taxes associated with the ho
Assuming Katy's rental receipts exceed the interest expense and property taxes a
All of these statements are correct.

82. 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.
B.
C.
D.

The Tax Court approach allocates more property tax and interest expense to renta
The Tax Court and the IRS approaches allocate the same amount of expenses othe
The IRS approach allocates interest expense and property taxes to rental use bas
None of these statements is correct.

83. 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.
B.
C.
D.

$0 net income. $1,000 depreciation expense carried forward to next year.
($1,000) net loss. $0 expenses carried over to next year.
$0 net income. $1,000 of other expense carried over to next year.
$0 net income. $1,000 of interest expense and property taxes carried over to ne

84. 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.
B.
C.
D.
E.

Depreciation expense, other expenses, property taxes and interest expense.
Other expenses, depreciation expense, property taxes and interest expense.
Property taxes and interest expense, depreciation expense, other expenses.
Other expenses, property taxes and interest expense, depreciation expense.
None of these statements is correct.

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85. 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.
B.
C.
D.

Harriet's deductible expenses are not limited to the amount of gross rental income
Harriet will be allowed to deduct all of the mortgage interest on the loan secured b
Harriet is required to include all of the rental receipts in gross income.
Harriet is required to allocate all expenses associated with the home to rental use

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

A.
B.
C.
D.
E.

Rent the property for 15 days or more during the year.
Use the property for personal purposes for no more than the greater of (a) 14 days
Use the property for personal purposes for no more than the lesser of (a) 14 days
Rent the property for 15 days or more during the year and use the property for pe
Rent the property for 15 days or more during the year and use the property for pe

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

A.
B.
C.
D.

The taxpayer will not be allowed to deduct the loss under any circumstance if the
The loss is fully deductible against the taxpayer's ordinary income no matter the c
If the taxpayer is not an active participant in the rental, the taxpayer may be allo
If the taxpayer is not allowed to deduct the loss due to the passive activity loss lim

88. Harvey rents his second home. During 2014, 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 2014?

A.
B.
C.
D.
89. Ilene rents her second home. During 2014, 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 2014?

A.
B.
C.
D.

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90. 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 (Jamison does not use
the simplified method for determining the home office expense deduction)?

A.
B.
C.
D.
E.

Depreciation expense, other expenses, property taxes and interest expense
Other expenses, depreciation expense, property taxes and interest expense
Property taxes and interest expense, depreciation expense, other expenses
Other expenses, property taxes and interest expense, depreciation expense
None of these statements is correct.

91. Which of the following statements regarding limitations on the deductibility of home
office expenses of employees is correct?

A.
B.
C.
D.

Deductible home office expenses of employees are miscellaneous itemized deduct
Deductible home office expenses of employees are miscellaneous itemized deduct

Deductible home office expenses of employees are for AGI deductions limited to g
Deductible home office expenses of employees are for AGI deductions not limited

92. Which of the following statements regarding limitations on the deductibility of home
office expenses of self-employed taxpayers is correct?

A.
B.
C.
D.

Deductible home office expenses are miscellaneous itemized deductions subject to
Deductible home office expenses are miscellaneous itemized deductions not subje
Deductible home office expenses are for AGI deductions limited to gross income f
Deductible home office expenses are for AGI deductions and may be deducted wi

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

A.
B.
C.
D.

The amount of home office expense allowed under the simplified method of compu
Taxpayers may choose to use the actual expense method for determining home offi
Under the simplified method of computing home office expenses, a taxpayer is no
All of these are correct.

Essay Questions

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94. 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?

95. 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?

96. 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?

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97. Darren (single) purchased a home on January 1, 2010 for $400,000. Darren lived in

the home as his primary residence until January 1, 2012 when he began using the
home as a vacation home. He used the home as a vacation home until January 1
2013 (he used a different home as his primary residence from January 1, 2012 to
January 1, 2013). On January 1, 2013, Darren moved back into the home and used it
as his primary residence until January 1, 2014 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 2014?

98. Heidi (single) purchased a home on January 1, 2005 for $400,000. She lived in the
home as her primary residence until January 1, 2012 when she began using the home
as a vacation home. She used the home as a vacation home until January 1, 2013
(she used a different home as her primary residence from January 1, 2012 to January
1, 2013). On January 1, 2013, Heidi moved back into the home and used it as her
primary residence until January 1, 2014 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 2014?

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99. 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?

100 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 $21,600 of interest expense on the first loan and $6,400 of interest on the
second loan. What is the maximum amount of the $28,000 of interest expense may
Rafael and Sandra deduct in year 2?

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101 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?

102 Leticia purchased a home on July 1, 2010 for $200,000. She paid $180,000 down and
.
financed the remaining $20,000. On January 1, 2012 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 2014, Leticia made interest-only payments of $15,000
on the loan. What amount of the $15,000 interest expense is Leticia allowed to
deduct?

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103 Robin purchased a home on July 1, 2009 for $300,000. She paid $200,000 down and
.
financed the remaining $100,000. On January 1, 2014 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 2014, 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 2014?

104 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)?

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105 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)?

106 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?

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107 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)?

108 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?

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109 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?

14-25
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