Chapter 18: Federal Taxation of Home Ownership

Question 1

When preparing an annual income tax return, a homeowner may be able to deduct all of the following regarding owner-occupied property, EXCEPT:
A. real estate taxes
B. mortgage interest on a first loan
C. mortgage interest on a second loan
D. the cost of repairs to the home

Answer 1

D. the cost of repairs to the home
(On an owner occupied home the only tax deductions that a homeowner may make are for mortgage interest and real estate taxes. There are no deductions for repairs, improvements or maintenance)

Question 2

A single woman purchased a home in 2008 for $225,000 and occupied that home as her principal residence until she sold it. In 2009, she spent $40,000 to add a garage with a playroom above. In 2011, she paid $4,500 to repaint the exterior of the house. The woman sold her home for $290,000 in 2012. She paid $17,000 in commissions and settlement expenses. The woman is in the 28% tax bracket. If long-term capital gain is taxed at 15%, how much federal income tax will she owe for the sale of her principal residence?
A. none
B. $525
C. $1,200
D. $2,240

Answer 2

A. none
(None of the calculations are necessary. She is entitled to the owner-occupied capital gains exclusion)

Question 3

Which of the following items related to their primary residence would a homeowner get to deduct from their annual income taxes?
A. insurance
B. maintenance
C. interest on their home loan
D. improvements

Answer 3

C. interest on their home loan
(On an owner occupied home the only deductions that a homeowner may make on their federal tax returns are mortgage interest and real estate taxes)

Question 4

In order to be entitled to an owner-occupied capital gains exclusion related to a primary residence, which of the following statements is correct?
A. The owner must occupy the home two consecutive years out of the last five.
B. If the owner has occupied the home for two years at any time during ownership the exclusion. applies
C. The owner must occupy the home for two years out of the last five years prior to sale.
D. The amount of the exclusion is $500,000 per person.

Answer 4

C. The owner must occupy the home for two years out of the last five years prior to sale.
(In order to be entitled to exclusion from capital gains tax on a primary residence, the owner must have occupied the home for two out of the last five years prior to sale. If the homeowner meets this requirement they are entitled to exclude up to a $250,000 gain if single and a $500,000 gain if married)

Question 5

The amount of the capital gains exclusion for the sale of a principal residence is limited to:
A. a sales price of $250,000 per individual and $500,000 per married couple
B. a gain of $250,000 per individual and a $500,000 gain per married couple per lifetime
C. a gain of $250,000 per individual and a $500,000 gain per married couple per residence
D. an aggregate lifetime gain of $500,000

Answer 5

C. a gain of $250,000 per individual and a $500,000 gain per married couple per residence
(The exclusion from capital gains tax is based on the gain, not the sales price and it can be applied to each residence, it is not a once per lifetime benefit)

Question 6

The depreciation that is allowable on investment property as a tax deduction is:
A. variable depreciation
B. determined by the owner
C. straight line depreciation
D. determined by appraisers using the cost approach

Answer 6

C. straight line depreciation
(The owner of an investment property gets a depreciation credit to recover the cost of the building. They do not get to depreciate or cost recover the value of the land. The depreciation is straight line depreciation on a scheduled determined by the IRS which means an equal amount of depreciation credit each year of ownership)

Question 7

Investors may be able to defer taxable events on investment property by following the IRS prescribed rules for:
A. recapturing depreciation
B. 1031 tax-deferred exchanges
C. selling the property as a short-term gain
D. holding onto the property until long-term capital gains rules apply

Answer 7

B. 1031 tax-deferred exchanges
(A 1031 tax deferred exchange never applies to a personal residence. It is a tool to allow investors to sell investment property and replace it with another investment property and defer the capital gains tax that would normally be due and payable)

Question 8

When asked a specific question about tax consequences, the BEST response for a real estate professional to make to their client is:
A. Owner-occupied properties create great tax benefits.
B. I recommend that you seek the advice of an accountant, tax professional or attorney.
C. Owners of real estate pay less taxes than people who rent.
D. There are never income taxes owed if you are selling a primary residence.

Answer 8

B. I recommend that you seek the advice of an accountant, tax professional or attorney.
(Real estate professionals should never provide tax or legal advice)