Principal Residence Exemption Quiz Questions

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  • 1. 

    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.

      Ordinary income/gain

    • B.

      Short-term capital gain

    • C.

      Long-term capital gain

    • D.

      Personal gain

    Correct Answer
    C. Long-term capital gain
    Explanation
    Serena purchased her principal residence three years ago and lived in it until she sold it this year, making a $300,000 gain. The IRS allows individuals to exclude up to $250,000 of the gain from the sale of their principal residence if they meet certain criteria. Since Serena was able to exclude $250,000 of the gain, the remaining $50,000 is considered a long-term capital gain. This is because she held the property for more than one year before selling it.

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  • 2. 

    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.

      Rental test

    • B.

      Use test

    • C.

      Ownership test

    • D.

      Business use test

    • E.

      Use test and ownership test

    Correct Answer
    E. Use test and ownership test
    Explanation
    To be eligible to exclude gain on the sale of a principal residence, the taxpayer must meet both the use test and the ownership test. The use test requires that the taxpayer has used the property as their main home for at least two out of the five years before the sale. The ownership test requires that the taxpayer has owned the property for at least two out of the five years before the sale. These tests ensure that the taxpayer has lived in the property and has a significant ownership stake in it before being eligible for the exclusion.

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  • 3. 

    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.

      A taxpayer may have more than one principal residence at any one time.

    • B.

      A taxpayer's principal residence may not be a houseboat.

    • C.

      A taxpayer with more than one residence may annually elect which residence is considered to be the principal residence.

    • D.

      None

    Correct Answer
    D. None
  • 4. 

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

    • A.

      A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale.

    • B.

      A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.

    • C.

      A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion.

    • D.

      For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.

    Correct Answer
    B. A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.
    Explanation
    The correct answer is that a taxpayer may simultaneously own two homes that are eligible for the home sale exclusion. This means that a taxpayer can own and live in more than one home and still be eligible to exclude the gain on the sale of their principal residence. This allows individuals who own multiple properties to potentially qualify for the exclusion on the sale of each property, as long as they meet the necessary criteria for each residence.

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  • 5. 

    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.

      0

    • B.

      250,000

    • C.

      500,000

    • D.

      600,000

    Correct Answer
    B. 250,000
    Explanation
    Larry and Darlene may exclude $250,000 of the gain. This is because according to the tax laws, a married couple filing jointly can exclude up to $500,000 of gain from the sale of their primary residence. Since Larry owned and lived in the home for five years before marrying Darlene, and they lived in the home for one year before selling it, they meet the ownership and use requirements to qualify for the exclusion. However, since Larry was the sole owner of the residence until it was sold, only his portion of the exclusion can be applied, which is $250,000.

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  • 6. 

    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.

      0

    • B.

      250,000

    • C.

      500,000

    • D.

      700,000

    Correct Answer
    C. 500,000
    Explanation
    Shantel and Daron may exclude $500,000 of the gain. This is because, according to the tax laws in the United States, a married couple filing jointly can exclude up to $500,000 of gain from the sale of their primary residence. In this scenario, Shantel owned and lived in the home for five years before marrying Daron, and they both lived in the home for two years before selling it. As a result, they meet the ownership and use requirements to qualify for the maximum exclusion.

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  • 7. 

    On February 1, 2013 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 2013 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.

      Under no circumstance will Stephen be allowed to exclude gain on home 2 if he sells home 2 in 2014.

    • B.

      Stephen will be eligible to exclude gain on home 2 only if he waits until 2018 to sell it.

    • C.

      In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2013.

    • D.

      None

    Correct Answer
    C. In certain circumstances, Stephen may be able to exclude gain on home 2 even if he sells home 2 in 2013.
    Explanation
    According to the information given, Stephen sold his principal residence (home 1) in 2013 and was able to exclude the entire gain on his tax return. He then purchased and moved into home 2 on the same day. If Stephen meets certain circumstances, he may be able to exclude gain on home 2 even if he sells it in 2013. This means that there are exceptions or conditions under which Stephen can still exclude the gain on home 2, regardless of the year of sale.

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  • 8. 

    On November 1, 2013, Jamie (who is single) purchased and moved into her principal residence. In early 2014, Jamie was laid off from her job. On February 1, 2014, 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 2014?

    • A.

      0

    • B.

      3125

    • C.

      31,250

    • D.

      35,000

    Correct Answer
    C. 31,250
    Explanation
    Jamie may exclude $31,250 from her gross income in 2014. According to the tax rules, if a taxpayer sells their principal residence and meets certain ownership and use requirements, they may be eligible to exclude up to $250,000 ($500,000 for married couples filing jointly) of the gain from their gross income. In this case, Jamie meets the ownership and use requirements as she purchased and moved into the home on November 1, 2013. Therefore, she can exclude the entire $35,000 gain from her gross income.

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  • 9. 

    Cameron (single) purchased and moved into his principal residence on July 1, 2013. On June 1, 2014, Cameron lost his job. Because he couldn't afford the payments on his new home, he sold it on July 1, 2014 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 2014 gross income?

    • A.

      0

    • B.

      2500

    • C.

      25,000

    • D.

      50,000

    Correct Answer
    A. 0
    Explanation
    Cameron is not allowed to exclude any of the $50,000 gain from his 2014 gross income because he did not meet the ownership and use tests for a principal residence. In order to qualify for the exclusion, Cameron must have owned and used the property as his principal residence for at least two out of the five years prior to the sale. Since Cameron only owned and lived in the property for one year before selling it, he does not meet the requirements for the exclusion and must include the entire gain in his gross income.

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  • 10. 

    Dawn (single) purchased her home on July 1, 2004. On July 1, 2012 Dawn moved out of the home. She rented out the home until July 1, 2013 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 2013 gross income?

    • A.

      0

    • B.

      207,000

    • C.

      225,000

    • D.

      230,000

    Correct Answer
    D. 230,000
    Explanation
    Dawn is allowed to exclude the full amount of the gain, which is $230,000, from her 2013 gross income. This is because she owned and used the home as her primary residence for at least two out of the five years before the sale, meeting the requirements for the exclusion of gain on the sale of a primary residence.

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  • 11. 

    Michael (single) purchased his home on July 1, 2003. On July 1, 2011 he moved out of the home. He rented out the home until July 1, 2012 when he moved back into the home. On July 1, 2013 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2013 gross income?

    • A.

      0

    • B.

      225,000

    • C.

      250,000

    • D.

      300,000

    Correct Answer
    C. 250,000
    Explanation
    Michael is allowed to exclude $250,000 from his 2013 gross income. According to the IRS rules, if a taxpayer meets the ownership and use tests, they can exclude up to $250,000 of gain from the sale of their primary residence if they are single. In this case, Michael owned the home for more than 2 years and used it as his primary residence for at least 2 years (from July 1, 2003, to July 1, 2011, and then from July 1, 2012, to July 1, 2013). Therefore, he meets the requirements and can exclude $250,000 of the $300,000 gain from his gross income.

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  • 12. 

    Ethan (single) purchased his home on July 1, 2004. On July 1, 2011 he moved out of the home. He rented the home until July 1, 2013 when he moved back into the home. On July 1, 2014 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2014 gross income?

    • A.

      0

    • B.

      168,000

    • C.

      200,000

    • D.

      210,000

    Correct Answer
    B. 168,000
    Explanation
    Ethan is allowed to exclude $168,000 from his 2014 gross income. This is because if a taxpayer meets the ownership and use tests, they can exclude up to $250,000 ($500,000 for married filing jointly) of gain from the sale of their main home. In this case, Ethan owned the home for 10 years (2004-2014) and used it as his main home for 7 years (2004-2011 and 2013-2014). Therefore, he meets the ownership and use tests and can exclude a portion of the gain from his gross income, which in this case is $168,000.

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  • 13. 

    What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?

    • A.

      0

    • B.

      25,000

    • C.

      250,000

    • D.

      500,000

    Correct Answer
    D. 500,000
    Explanation
    A married couple may exclude up to $500,000 from their gross income on the sale of their principal residence. This exclusion applies if they meet certain requirements, such as owning and using the property as their main home for at least two out of the five years before the sale. This means that they can avoid paying taxes on up to $500,000 of the profit they make from selling their home.

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  • 14. 

    Which of the following statements regarding home-related transactions is correct?

    • A.

      If a taxpayer converts a home from personal use to rental use, the basis of the rental property is the . greater of the basis of the property at the time of the conversion or the fair market value of the property at the time of the conversion.

    • B.

      If a taxpayer uses a residence as a rental property (and deducts depreciation expense against the basis of . the property) and as a personal residence the taxpayer will not be allowed to exclude the entire amount of gain even if the taxpayer otherwise meets the ownership and use tests and the amount of the gain is less than the limit on excludable gain.

    • C.

      If a taxpayer converts a rental home to a principal residence, the taxpayer's basis in the principal . residence is the greater of the basis of the home at the time of the conversion or the fair market value at the time of the conversion.

    • D.

      None

    Correct Answer
    B. If a taxpayer uses a residence as a rental property (and deducts depreciation expense against the basis of . the property) and as a personal residence the taxpayer will not be allowed to exclude the entire amount of gain even if the taxpayer otherwise meets the ownership and use tests and the amount of the gain is less than the limit on excludable gain.
    Explanation
    If a taxpayer uses a residence as a rental property and also lives in it as a personal residence, they will not be able to exclude the entire amount of gain when selling the property, even if they meet the ownership and use tests and the gain is below the limit on excludable gain. This means that they will have to pay taxes on a portion of the gain from the sale of the property.

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  • 15. 

    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.

      Personal use of the home exceeds the taxpayer's rental use of the home.

    • B.

      Personal use of the home exceeds half of the taxpayer's rental use of the home.

    • C.

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

    • D.

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

    Correct Answer
    D. Personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.
    Explanation
    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 personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home. This means that the taxpayer must use the residence for personal purposes for more than 14 days or more than 10 percent of the total time the residence is rented out in order to qualify for the home mortgage interest expense deduction.

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  • 16. 

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

    • A.

      Only the taxpayer's principal residence.

    • B.

      The taxpayer's principal residence and two other residences (chosen by the taxpayer).

    • C.

      The taxpayer's principal residence and one other residence (chosen by the taxpayer).

    • D.

      Any two residences chosen by the taxpayer.

    Correct Answer
    C. The taxpayer's principal residence and one other residence (chosen by the taxpayer).
    Explanation
    A qualified residence for determining a taxpayer's deductible home mortgage interest expense includes the taxpayer's principal residence and one other residence chosen by the taxpayer. This means that the taxpayer can deduct the mortgage interest paid on these two residences when calculating their taxable income. It does not include all residences chosen by the taxpayer or limit it to only the principal residence.

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  • 17. 

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

    • A.

      Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may . deduct interest expense on an unlimited amount of home acquisition indebtedness.

    • B.

      Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an . unlimited amount of home equity indebtedness.

    • C.

      Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited . amount of home equity indebtedness.

    • D.

      None

    Correct Answer
    C. Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited . amount of home equity indebtedness.
    Explanation
    Taxpayers are allowed to deduct interest expense on both acquisition indebtedness and home equity indebtedness, but there are limitations on the amounts. The correct answer states that taxpayers may deduct interest expense on a limited amount of both types of debt, indicating that there are restrictions on the total amount of interest that can be deducted for each type of debt. This means that taxpayers cannot deduct interest expense on an unlimited amount of either home equity indebtedness or acquisition indebtedness.

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  • 18. 

    Patrick purchased a home on January 1, 2013 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 2013 Patrick made interest-only payments on the loan of $30,000. On July 1, 2013, 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 2013, 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 2013 may he deduct as an itemized deduction?

    • A.

      0

    • B.

      3000

    • C.

      30,000

    • D.

      33,000

    Correct Answer
    D. 33,000
    Explanation
    During 2013, Patrick made interest-only payments on the initial loan of $30,000 and on the additional loan of $3,000, totaling $33,000. Since the interest expense is related to the acquisition of his residence, Patrick may deduct the full amount of $33,000 as an itemized deduction.

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  • 19. 

    Patricia purchased a home on January 1, 2013 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 2013, Patricia made interest-only payments on the loan of $66,000. What amount of the $66,000 interest expense Patricia paid during 2013 may she deduct as an itemized deduction?

    • A.

      0

    • B.

      6000

    • C.

      60,000

    • D.

      66,000

    Correct Answer
    D. 66,000
    Explanation
    During 2013, Patricia made interest-only payments on the loan of $66,000. Since the interest expense on the loan is a deductible expense, Patricia can deduct the full amount of $66,000 as an itemized deduction. This means that she can reduce her taxable income by $66,000 when calculating her income tax for the year.

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  • 20. 

    Lauren 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. During 2013, Lauren made interest-only payments on the loan. On July 1, 2013, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2013, she made interestonly 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.

      Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest . on the second loan unless she uses the loan proceeds to substantially improve the home.

    • B.

      Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest . on the second loan no matter what she does with the proceeds of the second loan.

    • C.

      Lauren may deduct all of the interest on the first loan or all of the interest on the second loan.

    • D.

      Lauren may deduct all of the interest on the first loan and all of the interest on the second loan no . matter what she does with the loan proceeds.

    Correct Answer
    A. Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest . on the second loan unless she uses the loan proceeds to substantially improve the home.
    Explanation
    Lauren may deduct all of the interest on the first loan because it is secured by the residence. However, she may only deduct two-thirds of the interest on the second loan unless she uses the loan proceeds to substantially improve the home. This means that if she uses the second loan to make improvements on the home, she can deduct all of the interest paid on that loan as well.

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  • 21. 

    Kimberly purchased a home on January 1, 2012 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 2012 and 2013 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2012, 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 2012, she made interest-only payments on this loan in the amount of $5,000 and during 2013, 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 2013 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?0

    • A.

      0

    • B.

      5000

    • C.

      18,000

    • D.

      26,000

    • E.

      26,353

    Correct Answer
    E. 26,353
    Explanation
    During 2013, Kimberly made interest-only payments on two loans - the first loan for $300,000 and the second loan for $125,000. The interest expense on the first loan would be $18,000 (as stated in the question), and the interest expense on the second loan would be $10,000. Therefore, the total interest expense paid during 2013 is $18,000 + $10,000 = $28,000. However, Kimberly can only deduct the interest expense on the second loan that was used to pay off student loans. Since the second loan amount was $125,000 and Kimberly paid $10,000 in interest on this loan, she can deduct $10,000 / $125,000 * $28,000 = $26,353 as an itemized deduction.

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  • 22. 

    Jessica purchased a home on January 1, 2012 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 2012 and 2013, Jessica made interest-only payments on the loan of $18,000 (each year). On July 1, 2012, 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 2012, she made interest-only payments on this loan in the amount of $5,000. During 2013, 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 2013 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.

      0

    • B.

      10,000

    • C.

      26,353

    • D.

      26,000

    • E.

      28,000

    Correct Answer
    E. 28,000
    Explanation
    Jessica may deduct the full amount of $28,000 interest expense she paid during 2013 as an itemized deduction because she used the proceeds of the second loan to improve her home. The interest paid on a loan used for home improvement is generally deductible as long as the total loan amount does not exceed the fair market value of the home. In this case, Jessica borrowed $125,000 when her home was worth $500,000, so she meets the requirement for deductibility. Therefore, the maximum amount of interest expense she can deduct is $28,000.

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  • 23. 

    Two years ago, 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 2013, Jaspreet made interest only payments of $6,000 on the $100,000 loan. On January 1, 2013, 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 2013, 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.

      6000

    • B.

      14,545

    • C.

      14,600

    • D.

      16,000

    Correct Answer
    C. 14,600
    Explanation
    Jaspreet can deduct the interest expense on the first home equity loan up to $5,000 ($80,000 x 9% = $7,200, but limited to the amount of the loan used for home-related purposes). He can also deduct the interest expense on the second home equity loan up to $2,800. Therefore, the maximum amount of interest expense Jaspreet can deduct on these loans as home-related interest expense is $7,800 ($5,000 + $2,800).

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  • 24. 

    Two years ago, 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 2013, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, 2013, 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 2013, 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.

      18,000

    • B.

      25,400

    • C.

      25,905

    • D.

      27,200

    Correct Answer
    C. 25,905
    Explanation
    Gabby can deduct the maximum amount of interest expense on these loans as home-related interest expense, which is $25,905. This is calculated by adding the interest payments on the first home equity loan ($5,600) and the interest expense on the second home equity loan ($3,600) to the interest-only payments made on the $300,000 loan ($18,000).

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  • 25. 

    Three years ago, 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, 2013, the outstanding balance on the loan was $40,000. On January 1, 2013, 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 2013, 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 2013 on the new mortgage as home related interest expense?

    • A.

      0

    • B.

      2000

    • C.

      5000

    • D.

      6000

    Correct Answer
    D. 6000
    Explanation
    Abby can deduct the full amount of $6,000 as home-related interest expense in 2013 on the new mortgage because she used the loan proceeds to pay off the balance of the existing mortgage and the remaining amount for purposes unrelated to the home. Since the loan was secured by the residence, the interest expense qualifies as home-related and is fully deductible.

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  • 26. 

    Three years ago, 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, 2013, the outstanding balance on the loan was $40,000. On January 1, 2013, 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 2013, 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 2013 on the new mortgage as home related interest expense?

    • A.

      2000

    • B.

      5000

    • C.

      7000

    • D.

      7500

    Correct Answer
    C. 7000
    Explanation
    Kris can deduct $7,000 of the $7,500 interest expense on the new loan in 2013 as home-related interest expense. This is because Kris used the loan proceeds to pay off the remaining balance on the existing mortgage, which was used to purchase the home. Therefore, the interest paid on the new loan can be considered as home-related interest expense and is deductible.

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  • 27. 

    Which of the following statements regarding qualified home equity indebtedness is correct?

    • A.

      The limit on qualified home equity indebtedness depends on filing status.

    • B.

      Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.

    • C.

      If the value of a home drops, the amount of qualified home equity indebtedness on an existing home equity loan also drops.

    • D.

      In order to deduct interest on home equity indebtedness, taxpayers must use the proceeds of a home . equity loan to improve the home.

    Correct Answer
    A. The limit on qualified home equity indebtedness depends on filing status.
    Explanation
    The correct answer is that the limit on qualified home equity indebtedness depends on filing status. This means that the maximum amount of home equity debt that can be deducted for tax purposes will vary depending on whether the taxpayer is filing as single, married filing jointly, or another filing status. This highlights the importance of understanding the specific rules and limitations that apply to home equity indebtedness deductions based on one's filing status.

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  • 28. 

    Amanda purchased a home for $1,000,000 in 2002 She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in 2013 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.

      600,000

    • B.

      700,000

    • C.

      1,000,000

    • D.

      1,100,000

    Correct Answer
    B. 700,000
    Explanation
    The total amount of qualifying home-related debt for tax purposes is $700,000. This is calculated by adding the remaining mortgage of $600,000 after the refinancing in 2013 to the amount borrowed during the refinancing, which is $1,000,000.

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  • 29. 

    On March 31, 2013, 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 2013 deduction for her points paid?

    • A.

      50

    • B.

      150

    • C.

      4500

    • D.

      6000

    Correct Answer
    D. 6000
    Explanation
    Mary's deduction for her points paid in 2013 is $6,000. Points paid on a mortgage loan to purchase a principal residence are generally deductible in the year they are paid. In this case, Mary paid 3 points, which is equivalent to 3% of the loan amount ($200,000). Therefore, she paid $6,000 in points. Since the points were paid in 2013, she can deduct the full amount of $6,000 on her tax return for that year.

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  • 30. 

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

    • A.

      Points paid in the form of a loan origination fee on an original home loan are deductible over the life of the loan.

    • B.

      Points paid in the form of prepaid interest on an original home loan are deductible over the life of the loan.

    • C.

      Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.

    • D.

      None

    Correct Answer
    C. Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.
    Explanation
    Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan. This means that if a homeowner refinances their mortgage and pays points in the form of prepaid interest, they can deduct these points over the life of the new loan. This is different from points paid in the form of a loan origination fee on an original home loan, which are also deductible but over the life of the loan. It is important to note that points paid in the form of prepaid interest on an original home loan are not mentioned in the options, so they are not the correct answer.

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  • 31. 

    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.

      All else equal, the break-even point for paying points on an original mortgage is longer than the break- . even point for paying points on a refinance.

    • B.

      All else equal, the break-even point for paying points on an original mortgage is longer for a taxpayer . who does not make extra principal payments each year on the loan than for a taxpayer who does make additional principal payments each year on the loan.

    • C.

      All else equal, the break-even point for a taxpayer paying points on an original mortgage is longer . when the taxpayer's marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed.

    • D.

      None

    Correct Answer
    C. All else equal, the break-even point for a taxpayer paying points on an original mortgage is longer . when the taxpayer's marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed.
    Explanation
    The correct answer states that the break-even point for a taxpayer paying points on an original mortgage is longer when the taxpayer's marginal income tax rate increases in the years subsequent to the original financing compared to a taxpayer whose marginal tax rate does not change in the years subsequent to the year in which the loan is executed. This means that if the taxpayer's tax rate increases over time, it will take longer for the savings from paying discount points to offset the upfront cost.

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  • 32. 

    On March 31, 2013, 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 2013 for her points paid?

    • A.

      200

    • B.

      150

    • C.

      4500

    • D.

      6000

    Correct Answer
    B. 150
    Explanation
    Mary can deduct $150 in 2013 for her points paid. Points paid to refinance a mortgage on a principal residence are generally deductible over the life of the loan. Since Mary's loan is for a 30-year period, she can deduct 1/30th of the points paid each year. In this case, 3 points were paid, so 1/30th of 3 points is $150.

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  • 33. 

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

    • A.

      A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly mortgage payments . to an escrow account held by her mortgage company.

    • B.

      Taxpayers are not allowed to deduct payments made for setting up water and sewer services.

    • C.

      An individual deducts real property taxes on her principal residence as a for AGI deduction.

    • D.

      Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.

    Correct Answer
    C. An individual deducts real property taxes on her principal residence as a for AGI deduction.
  • 34. 

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

    • A.

      The owner of the property at the time the property taxes are due is responsible for paying all of the real . property taxes on the property for the year. Consequently, this person is allowed to deduct all of the property taxes for the year.

    • B.

      Taxpayers are allowed to deduct the real property taxes they actually pay for the year.

    • C.

      Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property.

    • D.

      None

    Correct Answer
    C. Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property.
    Explanation
    The correct answer is "Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property." This means that when a taxpayer sells real property during a year, they are only allowed to deduct the property taxes for the portion of the year that they owned the property. The owner of the property at the time the property taxes are due is responsible for paying all of the real property taxes for the year, but they can only deduct the portion that corresponds to the time they owned the property.

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  • 35. 

    On July 1 of 2013, 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 2013?

    • A.

      0

    • B.

      4000

    • C.

      4500

    • D.

      5000

    • E.

      9000

    Correct Answer
    C. 4500
    Explanation
    Elaine is allowed to deduct the amount of real property taxes that she actually paid during the year. Even though the estimated property tax bill was $8,000, Elaine only paid $4,000 at the time of the purchase. However, she later discovered that the actual property taxes for the year were $9,000. Therefore, she wrote a check for $9,000 to pay the taxes. Since she paid $9,000 in real property taxes, she is allowed to deduct that amount for the year, which is $4,500 more than what she initially paid.

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  • 36. 

    Which of the following statements regarding the first time home buyer credit is correct?

    • A.

      Taxpayers who acquired a home in 2009 and claimed the credit are required to pay the credit back if . they live in the home for less than 15 years.

    • B.

      Taxpayers who acquired a home in 2010 and claimed the credit are required to pay the credit back if . they live in the home for less than 5 years.

    • C.

      Taxpayers who acquire a home in 2013 are not eligible for the credit.

    • D.

      None

    Correct Answer
    C. Taxpayers who acquire a home in 2013 are not eligible for the credit.
    Explanation
    Taxpayers who acquire a home in 2013 are not eligible for the credit. This statement is correct because the question asks for the correct statement regarding the first-time homebuyer credit. The other two statements mention requirements for paying back the credit if the taxpayers live in the home for less than a certain number of years. However, the correct statement is that taxpayers who acquire a home in 2013 are not eligible for the credit, indicating that they cannot claim this credit for their home purchase in that year.

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  • 37. 

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

    • A.

      A day for which a taxpayer rents a home to an unrelated party for less than the property's fair market . value is considered to be a personal use day.

    • B.

      A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day.

    • C.

      A day for which an unrelated non-owner stays in the home under a vacation exchange arrangement is . considered to be a personal use day.

    • D.

      A day for which the home is available for rent but is not occupied does not count as a personal use or a rental use day.

    Correct Answer
    B. A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day.
    Explanation
    A day for which a taxpayer rents a home to a relative for full fair market value is not considered to be a rental use day. This is because the question states that it is false, meaning that the statement is incorrect. In reality, if a taxpayer rents a home to a relative for full fair market value, it would be considered a personal use day, not a rental use day.

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  • 38. 

    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.

      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.

    Correct Answer
    D. Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.
    Explanation
    Kenneth should exclude the rental receipts from his gross income and not deduct the rental expenses because he rented his home for less than 15 days in the year. According to the tax laws, if a taxpayer rents their home for less than 15 days in a year, the rental income is not considered taxable and they are not allowed to deduct any expenses related to the rental. Since Kenneth rented his home for only 14 days and received $14,000 in rent, he falls under this exemption and does not need to report the rental income or deduct any expenses.

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  • 39. 

    Katy owns a second home. During 2013, 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.

      Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.

    • B.

      Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.

    • C.

      Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental . use, Katy's deductible expenses for 2013 may not exceed the amount of her rental receipts (she may not report a loss from the rental property).

    • D.

      All

    Correct Answer
    D. All
  • 40. 

    Which of the following statements regarding the IRS and/or Tax Court approaches to allocating homerelated 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

    Correct Answer
    B. The Tax Court and the IRS approaches allocate the same amount of expenses other than interest . expense and property taxes to rental use.
    Explanation
    Both the Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use. This means that they have a similar method of determining how much of the expenses can be attributed to the rental use of the property, excluding interest expense and property taxes.

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  • 41. 

    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.

      $0 net income. $1,000 depreciation expense carried forward to next year.

    • B.

      ($1,000) net loss. $0 expenses carried over to next year.

    • C.

      $0 net income. $1,000 of other expense carried over to next year.

    • D.

      $0 net income. $1,000 of interest expense and property taxes carried over to next year.

    Correct Answer
    A. $0 net income. $1,000 depreciation expense carried forward to next year.
    Explanation
    Brady's net income from the property is $0 because the rental receipts of $20,000 are offset by the total expenses of $21,000 ($7,000 interest expense and property taxes + $10,000 other expenses + $4,000 depreciation expense). However, Brady can carry forward $1,000 of depreciation expense to the next year.

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  • 42. 

    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.

      Depreciation expense, other expenses, property taxes and interest expense.

    • B.

      Other expenses, depreciation expense, property taxes and interest expense.

    • C.

      Property taxes and interest expense, depreciation expense, other expenses.

    • D.

      Other expenses, property taxes and interest expense, depreciation expense.

    • E.

      None

    Correct Answer
    E. None
  • 43. 

    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.

      Harriet's deductible expenses are not limited to the amount of gross rental income from the property.

    • B.

      Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.

    • C.

      Harriet is required to include all of the rental receipts in gross income.

    • D.

      Harriet is required to allocate all expenses associated with the home to rental use or personal use.

    Correct Answer
    B. Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.
    Explanation
    Harriet will not be allowed to deduct all of the mortgage interest on the loan secured by the property. The amount of mortgage interest that she can deduct will depend on the ratio of her personal use days to the total use days (personal use days + rental days). Since Harriet used the second home for 10 personal days out of a total of 210 use days (10 personal days + 200 rental days), she can only deduct a portion of the mortgage interest based on the ratio of 10/210.

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  • 44. 

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

    • A.

      Rent the property for 15 days or more during the year.

    • B.

      Use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

    • C.

      Use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

    • D.

      Rent the property for 15 days or more during the year and use the property for personal purposes for no . more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

    • E.

      Rent the property for 15 days or more during the year and use the property for personal purposes for no . more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

    Correct Answer
    D. Rent the property for 15 days or more during the year and use the property for personal purposes for no . more than the greater of (a) 14 days or (b) 10 percent of the total days rented.
    Explanation
    To be considered a rental property, a taxpayer must rent the property for at least 15 days during the year and use it for personal purposes for no more than the greater of 14 days or 10 percent of the total days rented. This means that the property must primarily be used for rental purposes rather than personal use.

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  • 45. 

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

    • A.

      The taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not . have passive income from other sources.

    • B.

      The loss is fully deductible against the taxpayer's ordinary income no matter the circumstances.

    • C.

      F the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss . even if the taxpayer does not have any sources of passive income.

    • D.

      F the taxpayer is not allowed to deduct the loss due to the passive activity limitations, the loss is . suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

    Correct Answer
    D. F the taxpayer is not allowed to deduct the loss due to the passive activity limitations, the loss is . suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.
    Explanation
    If a taxpayer experiences a net loss from a nonresidence (rental property) and is not allowed to deduct the loss due to passive activity limitations, the loss is suspended and carried forward until the taxpayer generates passive income or sells the property. This means that the taxpayer cannot immediately deduct the loss against their ordinary income, but they may be able to do so in the future if they have passive income or sell the property.

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  • 46. 

    Harvey rents his second home. During 2013, 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 2013?

    • A.

      35,000

    • B.

      25,000

    • C.

      5000

    • D.

      0

    Correct Answer
    C. 5000
    Explanation
    Harvey can deduct $5,000 of the net loss against his ordinary income in 2013. This is because as an active participant in the rental and with an AGI of $80,000, he can deduct up to $25,000 of rental real estate losses against his ordinary income. However, since his net loss is only $35,000, he can only deduct $5,000 (the remaining amount) against his ordinary income.

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  • 47. 

    Ilene rents her second home. During 2013, 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 2013?

    • A.

      15,000

    • B.

      10,000

    • C.

      5000

    • D.

      0

    Correct Answer
    C. 5000
    Explanation
    Ilene can deduct $5,000 of the net loss against her ordinary income in 2013. This is because, as an active participant in the rental activity, she can deduct up to $25,000 of rental real estate losses if her AGI is less than $100,000. However, since her AGI is $140,000, the amount she can deduct is reduced by 50% of the excess over $100,000. Therefore, the deduction is limited to $25,000 - ($140,000 - $100,000)/2 = $5,000.

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  • 48. 

    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?

    • A.

      Depreciation expense, other expenses, property taxes and interest expense

    • B.

      Other expenses, depreciation expense, property taxes and interest expense

    • C.

      Property taxes and interest expense, depreciation expense, other expenses

    • D.

      Other expenses, property taxes and interest expense, depreciation expense

    • E.

      None

    Correct Answer
    E. None
  • 49. 

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

    • A.

      Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

    • B.

      Deductible home office expenses of employees are miscellaneous itemized deductions not subject to the 2 percent floor.

    • C.

      Deductible home office expenses of employees are for AGI deductions limited to gross income from the business.

    • D.

      Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business.

    Correct Answer
    A. Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor.
    Explanation
    The correct answer states that deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI (Adjusted Gross Income) floor. This means that employees can deduct their home office expenses, but only to the extent that they exceed 2 percent of their AGI. In other words, they can only deduct the amount of home office expenses that exceed 2 percent of their AGI.

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  • 50. 

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

    • A.

      Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

    • B.

      Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor.

    • C.

      Deductible home office expenses are for AGI deductions limited to gross income from the business . minus non home office related expenses.

    • D.

      Deductible home office expenses are for AGI deductions and may be deducted without limitation.

    Correct Answer
    C. Deductible home office expenses are for AGI deductions limited to gross income from the business . minus non home office related expenses.
    Explanation
    The correct answer states that deductible home office expenses are for AGI deductions limited to gross income from the business minus non home office related expenses. This means that self-employed taxpayers can only deduct home office expenses up to the amount of their gross income from their business, minus any expenses that are not related to the home office. This limitation ensures that taxpayers cannot claim deductions for home office expenses that exceed their business income.

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  • Mar 20, 2023
    Quiz Edited by
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  • Apr 07, 2014
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