Chapter 14

Question 1

Because a personal residence is a “personal-use asset”, any loss realized is NOT recognized for tax purposes.

Answer 1

TRUE

Question 2

What is Code Section 121 exclusion provision from sale of personal residence?

Answer 2

Maximum exclusion:
- $500,000 for married filing joint taxpayers
- $250,000 for all other taxpayers

Question 3

What if the gain is in excess of the exclusion (121)?

Answer 3

• Excess is taxed as LTCG (preferential rates), if taxpayer
  meets long-term holding period.
• Excess taxed as STCG (ordinary rates), if taxpayer meets
  short-term holding period

Question 4

What test must you pass to be eligible for the Section 121 exclusion?

Answer 4

OWNERSHIP AND USE tests

Question 5

What is the general rules for sale of personal residence?

Answer 5

once a taxpayer claims a home sale exclusion, he/she is not eligible to claim another exclusion until at LEAST 2 YEARS pass from the time of the first sale, unless “unforeseen circumstances” exception is met (exception to the rule)

Question 6

Ownership Test

Answer 6

The taxpayer must have owned the property for at least 2 YEARS during the 5 year period ENDING on the date of sale.
- If MFJ, EITHER spouse can satisfy this requirement

Question 7

What was the Ownership test put in place?

Answer 7

this requirement is meant to prevent a taxpayer from buying a home, fixing it up, and soon
thereafter selling it and excluding the gain under Code § 121

Question 8

Use Test

Answer 8

-the taxpayer must have used the property as the taxpayer’s principal residence for at LEAST 2 YEARS
during the 5 year period ENDING on the date of sale
- If MFJ, BOTH spouses must satisfy this requirement to qualify for the MFJ increased amount of $500,000

Question 9

What was the Use test put in place?

Answer 9

meant to ensure that taxpayers are selling homes they actually lived in to get the special exclusion (§ 121), instead of investment property.

Question 10

For purposes of meeting the requirements of the ownership and use tests, the period of ownership and use MUST be continuous (a
single block of time).

Answer 10

FALSE

Question 11

You can use the sec. 121 exclusion rule once every _____ years.

Answer 11

2

Question 12

What is the exception to the rule “unforeseen circumstances”?

Answer 12

if taxpayer is required to sell the personal residence and does not meet the general rule above because of unforeseen circumstances, then the exclusion is still available but at a reduced amount

Question 13

What are examples of Unforeseen circumstances (hardship)?

Answer 13

change in employment, significant health issues, divorce, death of spouse, multiple births

Question 14

What is the formula for Unforeseen circumstances (hardship)?

Answer 14

full exclusion x qualifying months/24 months

Question 15

Can a taxpayer purchase a second home as a vacation home, rental property, or a combination of the two.

Answer 15

YES

Question 16

What are the 3 types of classifications for second home?

Answer 16

(1) Residence with minimal rental use (<14 days)
(2) Residence with significant rental use (>15 days -or- 10% of the total FMV rented days)
(3) Nonresidence (considered primarily rental property)

Question 17

What is the tax treatment of Nonresidence?

Answer 17

• rented at least 1 day
• personal use is NO MORE THAN the > 14 days -or- 10% of rental days
• includes all income in gross income (Schedule E)
• Deducts all rental expenses.s

Question 18

What is the tax treatment if Residence with Significant Rental Use?

Answer 18

• Include rental revenues in gross income (Schedule E)
• Allocate expenses between personal use and rental use.

Question 19

What is the tax treatment if Residence with Minimal Rental Use?

Answer 19

-Rental income is EXCLUDED from the tax return.
- No rental expenses can be deducted (utilities, repairs, depreciation, etc.) except those that are personal itemized deductions and deductible anyway

Question 20

What happens when the expenses exceed the gross rental revenue? (type 2)

Answer 20

the deductibility of the expenses is limited

Question 21

What are the 3 types of tiers of expenses for Type 2 property?

Answer 21

(1) Expenses for obtaining tenants and expenses allocated to the rental use of the home that would be deductible as itemized deductions even if the home was not rented
(2) All other expenses except for depreciation
(3) Depreciation expense (27.5 year property

Question 22

Which tier allows to you deduct expenses in FULL, even if it exceeds gross rental revenue?

Answer 22

Tier 1

Question 23

Any Tier 2 & 3 expenses NOT deducted in the current year due to the limitation are suspended and carried forward.

Answer 23

TRUE

Question 24

What is the IRS Method?

Answer 24

total rental days/total days used

Question 25

What is the Tax Court Method?

Answer 25

total rental days/days in year

Question 26

For type 3 property, is the taxpayer allowed to deduct the personal used portion of Tier 1 mortgage interest expenses?

Answer 26

NO, because it does NOT qualify as a "personal residence"

Question 27

For type 3 property, is the taxpayer allowed to deduct the personal used portion of Tier 1 property taxes?

Answer 27

YES, subject to limitation

Question 28

What is the general rule for Losses on rental property passive activity losses "PALS"?

Answer 28

taxpayers can only deduct passive losses in the current year to the EXTENT of their passive income in the current year

Question 29

What is the exception to the rule on PALS?

Answer 29

If the taxpayer is an “active participant” in the rental activity, then they can deduct up to $25,000 of the rental loss against nonpassive income

Question 30

What are the criteria to be considered an "active participant"?

Answer 30

- own at least 10% - participate in management decisions such as approving tenants, deciding rental terms, approving repairs and capital expenditures

Question 31

What is the Phase-out for the exception to the PALS rule?

Answer 31

50 cents for every dollar of AGI in excess of $100,000 (so, phased out completely at AGI of $150,000)

Question 32

Are the disallowed passive losses from rental real estate activities permanently lost?

Answer 32

NO, these losses are suspended in the current year and carried forward. They can be used in a future year if the taxpayer generates passive income or when the taxpayer sells the property that generated the passive loss

Question 33

The home office expense deduction is ONLY available to self-employed taxpayers?

Answer 33

TRUE

Question 34

What type of deduction is the home office expense deduction?

Answer 34

FOR AGI, but cannot create a LOSS

Question 35

What are the requirements to qualify for a "home office" deduction?

Answer 35

taxpayer must use their home/part of their home EXCLUSIVELY & REGULARLY as either: - principal place of busa for any of the taxpayer's trade/busa -OR- - place to meet with patients/clients in the normal course of busa

Question 36

what are the 2 different ways to compute the home office expense deduction?

Answer 36

(1) simplified method (2) actual expense method

Question 37

The taxpayer can choose either method each tax year. It is an annual choice and is not binding for future years. (home office expense deduction)

Answer 37

TRUE

Question 38

What is the Simplified Method?

Answer 38

- $5 per square foot - <=300 sq ft (therefore limited to $1,500) - requires less recordkeeping - CANNOT create a Sch. C NI Loss - NO CARRYOVER - allowed to deduct any mortgage interest and real property taxes related to the home as itemized deductions

Question 39

What is the Actual Expense Method?

Answer 39

Must allocate actual expenses between personal and business use of home - DIRECT exp: used in full - INDIRECT exp: usually prorated based on sq footage - CANNOT create a Sch. C NI Loss - CARRYFOWARD allowed - may deduct expenses in a specified order (Tiers 1-3)