38. [LO 1] Lauren owns a condomium. In each of the following alternative situations, determine whether the condominium should be treated as a residence or nonresidence for tax purposes?
a. Lauren lives in the condo for 19 days and rents it out for 22 days.
b. Lauren lives in the condo for 8 days and rents it out for 9 days
c. Lauren lives in the condo for 80 days and rents it out for 120 days
d. Lauren lives in the condo for 30 days and rents it out for 320 days.
45. LO 3] Javier and Anita Sanchez purchased a home on January 1, year 1 for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. On January 1, the Sanchezes also borrowed money on a second loan secured by the home for $75,000. The interest rate on the loan is 8 percent and the Sanchezes make interest-only payments in year 1 on the second loan.
a. Assuming the Sanchezes use the second loan to landscape the yard to their home, what is the maximum amount of interest expense (on both loans combined) they are allowed to deduct year 1?
b. Assume the original facts and that the Sanchezes use the $75,000 loan proceeds for an extended family vacation. What is the maximum amount of interest expense (on both loans combined) they are allowed to deduct in year 1?
c. Assume the original facts, except that the Sanchezes borrow $120,000 on the second loan and they use the proceeds for an extended family vacation and other personal expenses. What is the maximum amount of interest expense (on both loans combined) they are allowed to deduct in year 1?
49. [LO 3] On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home.
a. What is the amount of the interest expense the Franklins may deduct in year 1?
b. Assume that in year 2, the Franklins pay off the entire loan but at the beginning of year 3, they borrow $300,000 secured by the home at a 7 percent rate. They make interest-only payments on the loan during the year. What amount of interest expense may the Franklins deduct in year 3 on this loan? Does it matter what they do with the loan proceeds? Explain.
c. Assume the same facts as in (b), except that the Franklins borrow $80,000 secured by their home. What amount of interest expense may the Franklins deduct in year 3 on this loan? Does it matter what they do with the loan proceeds? Explain.
52. LO 3] On January 1, year 1 Brandon and Alisa Roy purchased a home for $1.5 million by paying $500,000 down and borrowing the remaining $1 million with a 7 percent loan secured by the home. Later the same day, the Roys took out a second loan, secured by the home, in the amount of $300,000.
a. Assuming the interest rate on the second loan is 8 percent. What is the maximum amount of the interest expense the Roys may deduct on these two loans in year 1?
b. Assuming the interest rate on the second loan is 6 percent, what is the maximum amount of interest expense the Roys may deduct on these two loans in year 1?
63. [LO 5] Dillon rented his personal residence at Lake Tahoe for 14 days while he was vacationing in Ireland. He resided in the home for the remainder of the year. Rental income from the property was $6,500. Expenses associated with use of the home for the entire year were as follows:
Real property taxes $3,100
Mortgage interest 12,000
Repairs 1,500
Insurance 1,500
Utilities 3,900
Depreciation 13,000
a. What effect does the rental have on Dillon’s AGI?
b. What effect does the rental have on Dillon’s itemized deductions?
Use the following facts to answer problems 64 and 65.
Natalie owns a condominium near Cocoa Beach in Florida. This year, she incurs the following expenses in connection with her condo:
Insurance $1,000
Advertising expense 500
Mortgage interest 3,500
Property taxes 900
Repairs & maintenance 650
Utilities 950
Depreciation 8,500
During the year, Natalie rented out the condo for 75 days, receiving $10,000 of gross income. She personally used the condo for 35 days during her vacation.
64. [LO 5]
Assume Natalie uses the IRS method of allocating expenses to rental use of the property.
a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo?
b. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo?
c. If Natalie’s basis in the condo at the beginning of the year was $150,000, what is her basis in the condo at the end of the year?
d. Assume that gross rental revenue was $1,000 (rather than $10,000), what amount of for AGI deductions may Natalie deduct in the current year related to the condo?
65. [LO 5] Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property.
a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo?
b. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo?
c. If Natalie’s basis in the condo at the beginning of the year was $150,000, what is her basis in the condo at the end of the year?
d. Assume that gross rental revenue was $2,000 (rather than $10,000), what amount of for AGI deductions may Natalie deduct in the current year related to the condo?
