Question 1

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to rental use is based on the number of rental days over rental days plus personal-use days.

Accepted Answer

This is correct as per the IRS guidelines for vacation homes that are rented out. The depreciation expense allocated to rental use is based on the ratio of rental days to the total of rental days and personal-use days. This ratio is then multiplied by the property's depreciation amount to arrive at the amount of depreciation expense that can be allocated to the rental use of the property.

Question 2

Under the tax law, a taxpayer's itemized deduction for home mortgage interest in any one particular year is limited to $10,000.

Accepted Answer

The limitation under tax law for itemized deductions generally applies to state and local taxes (SALT), not directly to home mortgage interest. The home mortgage interest deduction allows taxpayers to deduct interest on up to $750,000 ($375,000 if married filing separately) of qualified residence loans.

Question 3

The amount of a taxpayer's itemized deduction for all taxes combined, including state income taxes and real property taxes, is limited to $10,000 ($5,000 if married filing separately).

Accepted Answer

This is true according to the IRS regulations for tax year 2021. The deduction for state and local taxes (SALT) is capped at $10,000 for all taxpayers, except for those who are married filing separately, who are limited to a deduction of $5,000.

Question 4

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

Accepted Answer

Under the "Masters Rule," if a taxpayer rents their main home for fewer than 15 days per year, they do not need to report the rental income on their tax return and can keep the rental proceeds tax-free.

Question 5

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.

Accepted Answer

For an original home mortgage, points paid upfront can generally be deducted in full in the year they are paid, while points paid on a refinanced mortgage must usually be deducted over the life of the loan.

Question 6

A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

Accepted Answer

Self-employed taxpayers can deduct home office expenses as for AGI deductions on Schedule C, but employees can no longer deduct home office expenses due to changes in tax law from the Tax Cuts and Jobs Act of 2017, which suspended unreimbursed employee expenses as itemized deductions through 2025.

Question 7

A tax loss from a rental home is a passive activity loss.

Accepted Answer

Rental activities are generally considered passive activities for tax purposes, meaning that losses can only be used to offset passive income, not active income like wages or salaries.

Question 8

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

According to IRS guidelines, when a taxpayer uses a property for both personal and rental purposes, they must allocate expenses based on the number of days the property is used for each purpose. In Jennifer's case, she would allocate expenses for 364 days as rental use and one day as personal use.

Question 9

Expenses of a vacation home allocated to rental use are deductible for AGI.

Accepted Answer

According to IRS Publication 527, expenses related to a vacation home that is rented out for part of the year can be deducted as rental expenses for AGI purposes. Note that this only applies to the portion of expenses that are directly related to the rental use of the property. Any personal use expenses cannot be deducted.

Question 10

Taxpayers with high AGI are not allowed to deduct home mortgage interest expense.

Accepted Answer

Taxpayers with high AGI are allowed to deduct a portion of their home mortgage interest expense, but the amount of the deduction is limited based on their income level.

Question 11

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.

Accepted Answer

Since Jorge used the home for personal purposes for more than the greater of 14 days or 10% of the days it was rented (which is 36 days), he must allocate expenses between rental and personal use according to IRS rules for mixed-use property.

Question 12

A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Accepted Answer

Taxpayers can also deduct home mortgage interest on debt incurred to substantially improve their home, in addition to debt incurred to acquire or construct the home.

Question 13

When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

Accepted Answer

The answer of When a taxpayer finances her personal residence,...

Question 14

The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

Accepted Answer

Paying points upfront can result in a lower interest rate and save money in the long run. However, the savings will only outweigh the upfront cost if the taxpayer plans on staying in the home long enough for the reduced interest rate to make a significant impact. If the taxpayer plans on refinancing or moving within a few years, paying points may not be a cost-effective option.

Question 15

Taxpayers with home offices 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.

Accepted Answer

This is true. Taxpayers must allocate indirect expenses of the home between personal use and home office use, and only expenses allocated to the home office use are deductible when using the actual expense method.

Question 16

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

Accepted Answer

Taxpayers who rent out a property they own would report the rental income and expenses on Schedule E.

Question 17

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.

Accepted Answer

The Tax Court method of allocation tends to allocate more expenses to personal use than does the IRS method of allocation.

Question 18

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to personal use and to rental use.

Accepted Answer

This is true. Taxpayers must make a proportional allocation of expenses based on the number of days the home is used for personal purposes and the number of days it is rented out.

Question 19

A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.

Accepted Answer

The taxpayer is allowed to deduct only the portion of the property taxes that accrue from the date of purchase until the end of the tax year; the taxes must be prorated based on the portion of the year the taxpayer owned the property.

Question 20

Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.

Accepted Answer

Taxpayers are allowed to deduct real property taxes only in the year the taxes are actually paid to the taxing authority, not when the estimated taxes are paid into an escrow account.

Quiz 14: Tax Consequences of Home Ownership