Ch 14 Homeownership

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    Ch 14 Homeownership

    Tax and Nontax Consequences of Home Ownership

    Nontax Consequences Large investment. Potential for big return (or loss) on investment with use

    of leverage. Risk of default on home loan. Time and costs of maintenance. Limited mobility.

    Tax Consequences Interest expense deductible. Gain on sale excludable.

    Real property taxes on home deductible. Rental and business- use possibilities.

    In fact, taxpayers meeting certain home ownership and use requirements can permanently exclude up

    to $250,000 ($500,000 if married filing jointly) of realized gain on the sale.3 Gain in excess of the

    excludable amount generally qualifies as long-term capital gain subject to tax at preferential rates.

    Ownership test: The taxpayer must have owned the property for a total of two or more years during the

    five-year period ending on the date of the sale.

    Use test: The taxpayer must have used the property as her principal residence for a total of two or more

    years during the five-year period ending on the date of the sale.

    What qualifies as a principal residence? By definition, a taxpayer can have only one principal

    residence. When a taxpayer lives in more than one residence during the year, the determination of

    which residence is the principal residence depends on the facts and circumstances such as:

    THE KEY FACTS

    Exclusion of Gain on Sale of Personal Residence

    Must meet ownership and use tests. Must own home for at least two of five years before sale.

    Must use home as principal residence for at least two of five years before sale. For married couples to

    qualify for exclusion on a joint return, one spouse must meet ownership test and both spouses must

    meet use test.

    - Amount of time the taxpayer spends at each residence during the year.

    - The proximity of each residence to the taxpayers employment.

    - The principal place of abode of the taxpayers immediate family.

    - The taxpayers mailing address for bills and correspondence.

    A taxpayers principal residence could be a houseboat, trailer, or condominium a residence need not

    be in a fixed location.

    Married couples filing joint returns are eligible for the full $500,000 exclusion if either spouse meets the

    ownership test and both spouses meet the principal-use test.

    1. If a taxpayer converts a home from a personal residence to a rental property, the tax basis of

    the home becomes the lesser of (a) the taxpayers basis at the time of the conversion or (b) the

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    fair market value of the home at the time of the conversion (any loss that accrued while the

    property was personal-use property disappears at the time of the conversion).

    2. If a taxpayer deducts depreciation expense (and reduces the basis of the home by the amount of

    the depreciation expense) while renting it, either before or after using the home as a principal

    residence, the gain caused by the reduction in basis from the depreciation expense is not

    eligible for the exclusion. This gain is unrecaptured 1250 gain subject to a maximum tax rate of

    25 percent. See discussion in Chapter 10 for details.

    3. If a taxpayer converts a rental home to a principal residence, the basis of the home as a principal

    residence is the same basis the home had as a rental at the time the rental home was converted

    to a principal residence. Thus, if at the time of the con- version to personal use, the value of the

    home is less than the basis of the home, the built-in loss will never be deductible because the

    rental use has ceased. To deduct the loss, the taxpayer must sell the home rather than convert

    it to personal use.

    Once a taxpayer sells a residence and uses the exclusion on the sale, she will not be allowed to claim

    another exclusion until at least two years pass from the time of the first sale.

    If either spouse is ineligible for the exclusion because he or she person- ally used the $250,000 exclusion

    on another home sale during the two years before the date of the current sale, the couples available

    exclusion is reduced to $250,000. If a widow or widower sells a home that the surviving spouse owned

    and occupied with the other spouse, the surviving spouse is entitled to the full $500,000 exclusion

    provided that the surviving spouse sells the home within two years after the date of death of the

    spouse.

    Unusual or hardship circumstances. A taxpayer may be forced to sell his home before he meets the

    ownership and use requirements due to a change in em- ployment, significant health issues, or other

    unforeseen financial difficulties. In such cases, the maximum available exclusion is reduced. To qualify

    for the exclu- sion due to a change in employment, the taxpayers new place of employment must be at

    least 50 miles farther from the residence that is sold than was the previous place of employment. If

    there is no previous place of employment, the distance between the individuals new place of

    employment and the residence sold must be at least 50 miles.

    Exclusion of Gain on Sale of Personal Residence

    Exclusion Amount $500,000 for married couples fil ing joint returns. $250,000 for other taxpayers.

    Hardship provisions maximum exclusion = full exclusion months of qualifying ownership and use/24

    months. Gain eligible for exclu- sion may be reduced for time home is not used as principal residence ifit is being used as a principal residence at the time of the sale.

    Taxpayers may choose to use the number of days the taxpayer fully qualified for the exclusion divided

    by 730 days.

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    Note, as the previous example illustrates, that under the so-called hardship pro- vision, it is the full

    exclusion that is reduced, not necessarily the excludable gain. Consequently, if a taxpayers gain on the

    sale of a residence is less than the maxi- mum exclusion, the taxpayer may exclude the full amount of

    the gain. Finally, the rule limiting taxpayers to claiming one exclusion every two years does not apply totaxpayers selling under hardship circumstances.

    Limitation on exclusion for nonqualified use. The amount of gain eligible for exclu- sion may be

    limited for taxpayers selling homes after December 31, 2008.11 The limi- tation applies if, on or after

    January 1, 2009, the taxpayer uses the home for something other than a principal residence for a period

    (termed nonqualified use) and then uses the home as a principal residence before selling it. If the

    limitation applies, the percentage of the gain that is not eligible for exclusion is the ratio of the amount

    of the nonqualified use divided by the amount of time the taxpayer owned the home (purchase date

    through date of sale). Note that this provision does not reduce the maximum exclusion. Rather, it

    reduces the amount of gain eligible for exclusion.

    Exclusion of Gain from Debt Forgiveness on Foreclosure of Home Mortgage Prior to 2007, if a

    lender foreclosed (took possession of ) a taxpayers principal residence, sold the home for less than the

    taxpayers outstanding mortgage, and forgave the taxpayer of the remainder of the debt, the taxpayer

    was required to include the debt forgiveness in her gross income. However, from January 1, 2007,

    through December 31, 2012, taxpay- ers who realize income from this situation are allowed to exclude

    up to $2 million of debt forgiveness if the debt is secured by the taxpayers principal residence (the

    principal residence is collateral for the loan) and the debt was incurred to acquire, construct, or

    substantially improve the home.

    A major tax benefit of owning a home is that taxpayers are generally allowed to de- duct the interest

    they pay on their home mortgage loans as itemized ( from AGI) deductions.

    Taxpayers are allowed to deduct only qualified residence interest as an itemized deduction. Qualified

    residence interest is interest paid on the principal amount of acquisition indebtedness and on the

    principal amount of home-equity indebtedness. Both types of indebtedness must be secured by a

    qualified residence to qualify.

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    Qualified residence: The taxpayers principal residence (as described in the previous section) and one

    other residence. For a taxpayer with more than two residences, which property is treated as the second

    qualified residence is an annual electionthat is, the taxpayer can choose to deduct interest related to a

    particular second home one year and a different second home the next. The second residence is often a

    vacation home where the taxpayer resides part time. If the taxpayer rents the second residence for part

    of the year, the residence will qualify if the taxpayers personal use of the home exceeds the greater of

    (1) 14 days or (2) 10 percent of the number of rental days during the year. Consequently, for a second

    home to be considered a qualified residence, a taxpayer who rents the home for 100 days must use the

    home for personal purposes for at least 15 days, and a taxpayer who rents the second home for 200

    days must use the home for personal purposes for at least 21 days. If the taxpayer does not rent out the

    property, the taxpayer may choose the property as a qualified residence even if the taxpayers personal

    use of the property is 14 days or less.

    Home-equity indebtedness: Any debt, except for acquisition indebtedness, secured by the taxpayers

    qualified residence to the extent it does not exceed the fair mar- ket value of the residence minus the

    acquisition indebtedness. That is, for purposes of deducting interest, total qualifying home-related debtcannot exceed the total value of the home. For example, in a rapidly appreciating real estate

    environment, aggressive lenders may offer home-equity loans that result in loan-to-value ra- tios up

    to 125 percent. To the extent that the loan exceeds the equity in the home (value minus acquisition

    indebtedness), the interest is not deductible. The de- termination of the amount of home-equity debt is

    made at the time the loan is executed, so a subsequent decline in a homes value does not reduce the

    interest expense deduction.

    Borrowers can use the proceeds from a home-equity loan for any purpose, as long as the loan is secured

    by the residencehence, the popularity of home-equity loans to consolidate debt and lower monthly

    payments. However, as we note in Chapter 7, interest expense on home-equity loans not used topurchase or substan- tially improve the home is not deductible for AMT purposes.

    Home-Related Interest Deduction

    Deduction allowed for qualified residence interest. Principal residence and one other residence.

    If rented out, personal use must exceed greater of (1) 14 days or (2) 10 percent of

    rental days to be qualified residence. Acquisition indebtedness. Home-equity indebtedness.

    Home-Related Interest Deduction

    Acquisition Indebtedness Proceeds used to acquire or substantially improve home. Limited to

    $1,000,000. Principal payments permanently reduce amount.

    Limitation on amount of acquisition indebtedness. Interest expense of up to $1,000,000 of acquisition

    indebtedness is deductible as qualified residence interest. Once acquisition indebtedness is established

    for a qualifying residence (or for the sum of two qualifying residences), only principal payments on the

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    loan(s) can reduce it and only additional indebtedness, secured by the residence(s) and incurred to sub-

    stantially improve the residence(s), can increase it.

    When a taxpayer refinances a mortgage, how does the tax law treat the new loan? Assuming the

    taxpayer does not use the proceeds from the refinance to substantially improve her residence, the

    refinanced loan is treated as acquisition debt only to the extent that the principal amount of therefinancing does not exceed the amount of the acquisition debt immediately before the refinancing.

    Consequently, any amount bor- rowed in excess of the remaining principal on the original loan does not

    qualify as acquisition indebtedness. Interest on the excess part of this loan can only be de- ducted if it

    qualifies as home-equity indebtedness.

    Limitation on amount of home-equity indebtedness. As noted earlier, interest on home-equity

    indebtedness is deductible as qualified residence interest. However, the amount of qualified home-

    equity indebtedness is limited to the lesser of (1) the fair market value of the qualified residence(s) in

    excess of the acquisition debt related to the residence(s) and (2) $100,000 ($50,000 for married filing

    separately). Thus, a tax- payer can deduct interest on up to $100,000 of home-related debt above and

    beyond acquisition debt (limited to $1,000,000) as long as the debt is secured by the equity in the

    home(s) no matter what the taxpayer does with the proceeds from the home- equity loan.

    Home-Related Interest Deduction

    Home-Equity Indebtedness Can use proceeds for any purpose. Loan must be secured by equity in

    home (FMV > Debt). $100,000 limit.

    When a taxpayers home-related debt exceeds the limitations, the amount of de- ductible interest can

    be determined in one of two ways. First, the deductible interest can be computed as the product of (1)

    total interest expense on debt secured by the home and (2) the ratio of qualified debt to total debt

    outstanding on the home. This average interest expense option is summarized as follows:

    The second method is based on the chronological order of when the loans were exe- cuted, rather than

    as a weighted average. A taxpayer can choose to deduct all interest on earlier loans up to the limit on

    qualifying debt. Once the limit on qualifying debt is reached, interest on debt above the limit is not

    deductible.

    Home-Related Interest Deduction

    If combined debt exceeds limitations Average method: Total interest qualifying debt/total debt.

    Chronological method: Deduct interest on loans based on chronological order loans were executed

    (FIFO).

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    Acquisition debt and home-equity debt can apply to the same loan. Interest-deductible loan of up

    to $1.1M secured by the home.

    Finally, even though there are separate limits on acquisition indebtedness and home- equity

    indebtedness, both limits can apply to the same loan.

    Mortgage Insurance Taxpayers are allowed to deduct as qualified residence interest expense premiums

    paid or accrued on mortgage insurance (insurance premiums paid by the borrower to protect the lender

    against the borrower defaulting on the loan). To qualify, the premiums for the mortgage insurance must

    be paid or accrued in con- nection with acquisition indebtedness on a qualified residence and must be

    paid by December 31, 2010. The deduction does not apply to mortgage insurance contracts issued

    before January 1, 2007. The (itemized) deduction is phased out by 10 percent for every $1,000 (or

    fraction thereof) that the taxpayers AGI exceeds $100,000.

    Points A home buyer arranging financing for a home typically incurs several loan- related fees or

    expenses including charges for points. A point is 1 percent of the prin- cipal amount of the loan. In

    general, borrowers pay points to lenders in exchange for reduced interest rates on loans. However,

    borrowers may also pay lenders for other purposes (for example, to compensate lenders for the service

    of providing the loan). In order for taxpayers to deduct points, the points must be paid for a reduced

    interest rate (rather than for the service of providing the loans).

    The IRS will treat points as deductible qualified residence interest if the following requirements are met:

    1. The settlement statement (see Appendix Athe settlement statement details the monies paid

    out and received by the buyer and seller as part of the loan trans- action) must clearly designate

    the amounts as points payable in connection with the loan, for example as loan origination

    fees, loan discount, or discount points. (These amounts are typically provided on lines 801and 802 of the set- tlement statement.)

    2. The amounts must be computed as a percentage of the stated principal amount of the loan.

    3. The amounts paid must conform to an established business general practice of charging points

    for loans in the area in which the residence is located, and the amount of the points paid must

    not exceed the amount generally charged in that area.

    4. The amounts must be paid in connection with the acquisition of the taxpayers principal

    residence and the loan must be secured by that residence (the deduction for points is not

    available for points paid in connection with a loan for a second home).

    5. The buyer must provide enough funds in the down payment on the home to at least equal the

    cost of the points (the buyer is not allowed to borrow from the lender to pay the points).However, points paid by the seller to the lender in connection with the taxpayers loan are

    treated as paid directly by the tax- payer. Consequently, such points are generally deductible by

    the buyer.

    Note that points paid in refinancing a home loan are not immediately deductible by the homeowner.

    These points must be amortized and deducted on a straight-line basis over the life of the loan.

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    Real Property Taxes

    Real property tax payments are deductible by taxpayers conducting self-employment activities against

    business income as for AGI deductions, by landlords against rental income as for AGI deductions, and by

    individuals as itemized deductions. As we discussed in Chapter 6, taxpayers who do not itemize

    deductions are allowed to deduct real property taxes by increasing the amount of their basic standarddeduction by the lesser of (1) the amount of real property taxes paid during the year or (2) $500 ($1,000

    for a married couple filing jointly).

    Taxpayers are not allowed to deduct fees paid for setting up water and sewer services, and assessments

    for local benefits such as streets and sidewalks.22 Taxpayers generally add these expenditures to the

    basis of their property.

    The tax deduction is based on the relative amount of time each party owned the property during the

    year (or period over which the property taxes are payable). The seller gets a deduction for the taxes

    allocable for the period of time up to and including the day before the date of the sale. The taxes

    allocable to the day of the sale through the end of the property tax year are deductible by the buyer.

    Real Estate Taxes

    Applies to homes, land, business buildings, and other types of real estate.

    Homeowners frequently pay real property tax bill to escrow account. Deduction timing based on

    payment of taxes to governmental body and not escrow account.

    When homeowners sell home during year. Deduction is based on proportion of year tax- payer

    lived in home no matter who actually pays tax.

    First-Time Home Buyer Credit

    Refundable first-time home buyer credit for first-time home buyers purchasing homes.

    If purchased home in 2008 (on or after April 9), maximum credit was $7,500 and taxpayer must pay

    back credit over 15 years.

    If purchased home in 2009 (through November 6), maximum credit was $8,000 and taxpayers need

    not pay it back.

    If purchased November 7, 2009 through April 30, 2010, maximum credit of $8,000 unless a long- time

    owner of principal residence then maxi- mum credit of $6,500.

    Taxpayers are also eligible for the credit if they enter into a written binding contract to purchase the

    home before May 1, 2010, and they close on the purchase of a principal residence before July 1, 2010

    Taxpayers who purchase a home from November 7, 2009 through April 30, 2010 but are not first-time

    home buyers are still eligible to claim the FTHTC if they are considered to be long-time residents of the

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    same principal residence. To qualify as a long-time resident, the taxpayer (and, if married, the

    taxpayers spouse) must have owned and used the same principal residence for any 5-consecutive year

    period during the 8-year period ending on the date of the purchase of the principal residence that

    qualifies for the credit. The FTHTC available to long-time residents is the lesser of (1) 10% of the

    purchase price or (2) of $6,500 ($3,250 if married filing separately).

    Rental Use of the Home

    Tax treatment depends on amount of personal and rental use. The three categories are: 1. Residence

    with mini- mal rental use (personal residence)

    2. Residence with signifi- cant rental use (vacation home) 3. Nonresidence (rental property)

    27 This includes use by a co-owner even when the co-owner pays a usage fee.

    To make these determinations, the taxpayer needs to calculate the number of days the rental property

    was used for personal use during the year and the number of days the property was rented out during

    the year. Rental use includes (1) days when the property is rented out at fair market value and (2) days

    spent repairing or maintaining the home for rental use. Days when the home is available for rent, but

    not actually rented out, do not count either as personal days or as rental days.

    A home is considered to be a residence for tax purposes if the taxpayer uses the home for personal

    purposes for more than the greater of 14 days or 10 per- cent of the number of rental days during the

    year. For example, if a taxpayer rents her home for 200 days and uses it for personal purposes for 21

    days or more, the home is considered to be a residence for tax purposes. If the same taxpayer used the

    home for personal purposes for 20 days, the home would not be considered to be a residence for tax

    purposes.

    Rental Use of the Home

    Residence with minimal rental use. Taxpayer lives in the home at least 15 days and rents it 14 days

    or fewer.

    Exclude all rental income. Dont deduct rental expenses.

    Owner is, however, allowed to deduct qualified residence interest and real property taxes on the second

    home as itemized deductions.

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    discussed below. If the home rental is deemed to be a not-for-profit activity, the loss is subject to the

    hobby loss rules in 183.

    Losses on Rental Property

    Rental Losses

    Losses on home rentals in nonresidence use category are passive losses.

    Passive loss rules gener- ally limit deductions for losses from passive ac- tivities such as rental to

    passive income from other sources.

    Passive losses in ex- cess of passive income are suspended and de- ductible against passive income in

    the future or when the taxpayer sells the passive activity gen- erating the loss.

    Rental real estate exception to passive loss rules Applies to active participants in rental property.

    Deduct up to $25,000 of rental real estate loss against ordinary income. $25,000 maximumdeduction phased out by 50 cents for every dollar of AGI over $100,000 (excluding the rental loss

    deduction). Fully phased out at $150,000 of AGI.

    By definition, a rental activity (includ- ing a second home rental that falls in the nonresidence category)

    is considered to be a passive activity. Recall that second homes falling in the significant personal and

    rental use category are not passive activities. See 469(j).

    A taxpayer who is an active participant in a rental activity may be allowed to deduct up to $25,000 of the

    rental loss against nonpassive income. Consistent with a number of tax benefits, the exception amount

    for active owners is phased out as income increases: the $25,000 maximum exception amount is phased

    out by 50 cents for every dollar the taxpayers adjusted gross income (before considering the rental loss)

    exceeds $100,000. Consequently, the entire $25,000 is phased out when the taxpayers adjusted gross

    income reaches $150,000.

    These losses are suspended until the taxpayer generates passive income or until the taxpayer sells the

    property that generated the passive loss. On the sale, in addition to reporting gain or loss from the sale

    of the property, the taxpayer will be allowed to deduct suspended passive losses against ordinary

    income.

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    BUSINESS USE OF THE HOME

    To qualify for home office deductions, a taxpayer must use her homeor part of her homeexclusivelyand regularly as either (1) the principal place of business for any of the taxpayers trade or businesses, or

    (2) as a place to meet with patients, cli- ents, or customers in the normal course of business.

    280A. If taxpayers rent the home they occupy and they meet the requirements for business use of

    thehome, they can deduct part of the rent they pay. To determine the amount of the deduction,

    multiply the rental payment by the percentage of the home used for business purposes.

    This is a facts-and-circumstances determination based upon (a) the total time spent doing work at each

    location, (b) the facilities for doing work at each location, and (c) the relative amount of income derived

    from each location. By definition, a taxpayers principal place of business also includes the place of

    business used by the taxpayer for the administrative or management activities of the taxpayers trade orbusiness if there is no other fixed location of the trade or business where the taxpayer conducts

    substantial administrative or management activities of the trade or business.

    The clients or patients must visit the taxpayers home in person. Communication through telephone calls

    or other types of communi- cation technology does not qualify.

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    Rather, this gain is treated as unrecaptured 1250 gain and is subject to a maximum 25 percent tax rate

    (see Chapter 10 for detailed discussion of 1250 gain).

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    Compute the taxable gain on the sale of a residence and explain the requirements for exclud- ing gain on

    the sale.

    If they meet ownership and use requirements, married taxpayers may exclude up to $500,000 of

    gain on the sale of their principal residence. Single taxpayers may exclude up to $250,000 of gain on the

    sale of their principal residence.

    To qualify for the exclusion on the sale of real estate, taxpayers must own and use the home as

    their principal residence for two of the previous five years preceding the sale.

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    The amount of gain eligible for exclusion may be reduced if after December 31, 2008, the

    taxpayer uses the home as a vacation home or rental property and then uses the home as a principal

    residence before selling it.

    Determine the amount of allowable interest expense deductions on loans secured by a residence.

    Taxpayers may deduct interest on up to $1,000,000 of acquisition indebtedness of their

    principal residence and one other residence.

    Taxpayers may deduct interest on up to $100,000 of home-equity indebtedness on their

    principal residence and one other residence.

    Taxpayers may immediately deduct points paid (discount points and loan origination fees) on

    qualifying home mortgages used to acquire the taxpayers principal resi- dence if certain requirements

    are met. Qualifying points paid on a loan refinancing are deductible over the life of the loan.

    Discuss the deductibility of real property taxes and describe the first-time home buyer credit.

    Taxpayers deduct real property taxes when the taxes are paid to the taxing jurisdiction and not

    when the taxes are paid to an escrow account.

    When a piece of real property is sold during the year, the tax deduction for the property is

    allocated to the buyer and seller based on the portion of the year that each held the property no matter

    who pays the taxes.

    First-time home buyers could claim a refundable credit of $7,500 ($3,750 for married taxpayers

    filing separately) for home purchases during 2008 (on or after April 8, 2008), or a refundable credit of

    $8,000 ($4,000 for married taxpayers filing separately) for home purchases during 2009 (through

    November 6). The credit was phased-out based on taxpayers modified AGI.

    Taxpayers acquiring a new home after November 6, 2009 but before May 1, 2010 are eligible for

    a maximum refundable first-time home owner credit of $8,000 ($4,000 if married filing separately) if

    they did not own a principal residence in the three years prior to the purchase. Taxpayers who owned a

    principal residence for a 5 consecutive years during the 8-year period before the new home purchase

    are eligible for a maximum first-time home buyers credit of $6,500 ($3,250 if married filing separately).

    Taxpayers who claimed the credit for purchases in 2008 must pay it back in 15 equal annual

    installments beginning two years after the year in which they purchased the resi- dence that qualified

    them for the credit.

    Explain the tax issues and consequences associated with rental use of the home, including determining

    the deductibility of residential rental real estate losses.

    Taxpayers who live in a home for 15 days or more and rent the home out for 14 days or less (a

    residence with minimal rental use) do not include gross rental receipts in tax- able income and do not

    deduct rental expenses.

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    Taxpayers who both reside in and rent out a home for a significant portion of the year (a

    residence with significant rental use) include rental revenue in gross income, deduct direct rental

    expenses not relating to the home (expenses to obtain tenants), and allocate home-related expenses

    between personal use and rental use of the home. They deduct mortgage interest expense and real

    property taxes allocated to the rental use of the home as for AGI deductions and the mortgage interest

    expense and real property taxes allocated to the personal use of the home as itemized deductions. The

    remaining de- ductions allocated to the rental use of the home are deductible in a particular se- quence

    and the amount of these deductions cannot exceed rental revenue in excess of direct rental expenses

    and rental mortgage interest and real property taxes.

    Taxpayers who rent a home with minimal or no personal use (nonresidence) include rental

    receipts in income and deduct all rental expenses. In this situation expenses exceeding income are

    subject to the passive activity loss rules.

    Taxpayers may be able to deduct up to $25,000 of passive loss on their rental home if they are

    active participants with respect to the property. This deduction is phased out for taxpayers with

    adjusted gross income between $100,000 and $150,000.

    Describe the requirements necessary to qualify for home office deductions and compute the deduction

    limitations on home office deductions.

    To deduct expenses relating to a home office, the taxpayer must use the home exclusively and

    regularly for business purposes.

    Home-related expenses are allocated between business expenses and personal expenses based

    on the size of the office relative to the size of the home.

    Mortgage interest and real property taxes allocated to business use of the home are deductible

    in full without regard to the income of the business.

    Other expenses allocated to the business use of the home are deducted in a particular

    sequence. The deduction for these expenses cannot exceed the taxpayers net Schedule C income

    (before home office expenses) minus the mortgage interest and real property taxes allocated to

    business use of the home.