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Exam 14: Tax Consequences of Home Ownership

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Question 1

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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 direct 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.

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

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Question 2

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

A) True
B) False

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Question 3

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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.

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

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

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?

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.

A personal residence is not a capital asset.

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?

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?

At most,a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.

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

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?

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers 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).

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.

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.

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?

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?

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 (assume this is not a leap year)?