Principal Residence Exemption Quiz Questions

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.

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.

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.

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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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.

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.

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.

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.

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.

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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The correct answer is "All." This means that all of the statements regarding the home office expense deduction are correct. The first statement states that the amount of home office expense allowed under the simplified method is limited to a fixed amount, regardless of income or office size. The second statement states that taxpayers can choose to use either the actual expense method or the simplified method in different years. The third statement states that under the simplified method, taxpayers cannot deduct any depreciation associated with a home as a home office expense. Therefore, all of these statements are correct.

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.

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.

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.

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.

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.

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.

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.

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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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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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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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.

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.

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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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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.