Chapter 14 Tax Consequences of Home Ownership

1. [LO
1] How does a taxpayer determine whether
a dwelling unit is treated as a residence or nonresidence for tax purposes?

2. [LO
1] Does a residence for tax purposes need to be situated at a fixed
location? Explain.

3. [LO 1] When determining whether a dwelling
unit is treated as a residence or a nonresidence for tax purposes, what
constitutes a day of personal use and what constitutes a day of rental use?

4. [LO 1] A taxpayer owns a home in Salt Lake
City, Utah and a second home in St. George, Utah. How does the taxpayer determine which home
her principal residence is for tax purposes?
5. [LO 2] What are the ownership and use
requirements a taxpayer must meet to qualify for the exclusion of gain on the
sale of a residence?

6. [LO
2] Under what circumstances, if any, can a taxpayer fail to meet the ownership
and use requirements but still be able to exclude all of the gain on the sale
of a principal residence?

7. [LO 2] Under what circumstances can a taxpayer
meet the ownership and use requirements for a residence but still not be
allowed to exclude all realized gain on the sale of the residence?

8. [LO
2] A taxpayer purchases and lives in a home for a year. The home appreciates in value by
$50,000. The taxpayer sells the home
after her employer transfers her to an office in a nearby city. The taxpayer buys a new home. What information do you need to obtain to
determine whether the taxpayer is allowed to exclude the gain on the sale of
the first home?

9. [LO 3] Juanita owns a principal residence in
New Jersey, a cabin in Montana, and a houseboat in Hawaii. All of these properties have mortgages on
which Juanita pays interest. What
limits, if any, apply to Juanita’s mortgage interest deductions? Explain whether deductible interest is
deductible for AGI or from AGI?

10. [ LO 3] Barbi really wants to acquire an
expensive automobile (perhaps more expensive than she can really afford). She has two options. Option 1: finance the purchase with an
automobile loan from her local bank at a 7 percent interest rate or Option 2:
finance the purchase with a home-equity loan at a rate of 7 percent. Compare and contrast the tax and nontax
factors Barbi should consider before deciding which loan to use to pay for the
automobile. Barbi typically has more
itemized deductions than the standard deduction amount.

11. [LO 3] Lars
and Leigha saved up for years before they purchased their dream home. They were considering (1) using all of their
savings to make a large down payment on the home (90 percent of the value of
the home) and barely scraping by without the backup savings or (2) making a
more modest down payment (50 percent of the value of the loan) and holding some
of the savings in reserve as needed if funds get tight. They decided to go with the large down
payment because they figured they could always refinance the home to pull some
equity out of the home if things got tight.
What advice would you give them about the tax consequences of their
decision?
12. [LO 3] How are acquisition indebtedness and
home-equity indebtedness similar? How
are they dissimilar?
13. [LO 3] Why might it be good advice from a tax
perspective to think hard before deciding to quickly pay down mortgage debt?

14. [LO 3] Can portions
of one loan secured by a residence consist of both acquisition indebtedness and
home-equity indebtedness? Explain.

15. [LO 3] When
a taxpayer has multiple loans secured by her residence that in total exceed the
limits for deductibility, how does the taxpayer determine the amount of the
deductible interest expense?

16. [LO 3]
Compare and contrast the characteristics of a deductible point from a
nondeductible point on a first home mortgage.

17. [LO 3] Is
the break-even period generally longer or shorter for points paid to reduce the
interest rate on initial home loans or points paid for the same purpose on a
refinance? Explain.

18. [LO 3]
{Planning} Under what circumstances is it likely economically beneficial to pay
points to reduce the interest rate on a home loan?