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Exam 14: Tax Consequences of Home Ownership

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Question 1

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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.

A) True
B) False

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Question 2

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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?

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Question 3

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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?

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

A personal residence is not a capital asset.

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.

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.

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

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

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?

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.

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

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 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.

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?

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

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.

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

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).

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