c14 - Chapter 14 Tax Consequences of Home Ownership...

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Chapter 14 Tax Consequences of Home Ownership INSTRUCTOR’S MANUAL Learning Objectives 1. Determine whether a home is considered a principal residence, a residence (not principal), or a nonresidence for tax purposes. 2. Compute the taxable gain on the sale of a residence and explain the requirements for excluding gain on the sale. 3. Determine the amount of allowable interest expense deductions on loans secured by a residence. 4. Discuss the deductibility of real property taxes. 5. Explain the tax issues and consequences associated with rental use of the home, including determining the deductibility of residential rental real estate losses. 6. Describe the requirements necessary to qualify for home office deductions and compute the deduction limitations on home office deductions. Teaching Suggestions This chapter discusses many issues associated with home ownership. When they start their careers students will be faced with the decision of whether to buy or rent a home. This chapter should provide them enough background to make informed decisions not only about whether to buy or rent but also to make informed decisions about financing or refinancing home loans. Some of the more difficult topics for students to understand are that the acquisition debt and home equity debt limitations may apply to the same loan (home equity debt does not have to be a separate “second” mortgage) and the break-even period for paying points on a home loan. You may want to help students make sense of the sample settlement statement provided in the appendix so this document is familiar to them when the buy or sell property. It may be productive to help students understand the Tax Court (Bolton) and IRS methods for allocating rental expenses and to point out that, while in general the Tax Court method is more favorable, this is not always the case. Note that Exhibit 14-6 summaries the tax rules associated with renting a home. This exhibit may be a useful discussion tool. Also, Appendix B provides a flowchart of tax rules relating to home use for rental purposes. Note that this chapter includes some discussion of the $25,000 rental real estate exception for passive losses because this rule may be relevant for taxpayers renting a second home. However, most of the passive loss rule discussion is provided in Chapter 7. Finally, students should understand that it is difficult to qualify for the home office deduction and that deducting home office expenses makes the taxpayer more likely to be audited and may require the taxpayer to recognize gain on the sale of the home that would otherwise be excluded. Also, the IRS recently provided that taxpayers can choose to use the actual expense method for computing the home office expense deduction or the simplified method. Taxpayers can choose one method for one year and the other for another—that is, they don’t have to apply the same method each year.
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This chapter usually generates considerable student interest. Try to focus on questions relating to the main stream topics and avoid questions that get the entire class off track.
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