CMPS - Certified Mortgage Planning Specialist Mortgage and Tax Strategies Questions and Answers — Questions and Answers
Question 1: A married couple sells their primary residence for a $600,000 profit. They have owned and lived in the home for the past 10 years. How much of the capital gain from the sale can they exclude from their taxable income?
- $0
- $250,000
- $500,000 (Correct answer)
- $600,000
Correct answer: $500,000
According to Section 121 of the Internal Revenue Code, married couples filing jointly can exclude up to $500,000 of capital gains from the sale of their primary residence. To qualify, they must have owned and used the home as their main residence for at least two of the five years preceding the sale. Since this couple meets the criteria, they can exclude $500,000 of the profit, leaving $100,000 as a taxable capital gain.
Question 2: Under the current tax law (post-December 15, 2017), what is the maximum amount of mortgage debt on which a homeowner can deduct interest for a primary residence?
- $500,000
- $750,000 (Correct answer)
- $1,000,000
- There is no limit.
Correct answer: $750,000
For mortgages taken out after December 15, 2017, homeowners can deduct the interest paid on up to $750,000 of mortgage debt used to buy, build, or substantially improve their primary or secondary residence. For married taxpayers filing separately, the limit is $375,000. Mortgages taken out on or before December 15, 2017, are subject to the previous limit of $1 million.
Question 3: Which of the following is a requirement for a homeowner to be able to deduct the interest paid on a Home Equity Line of Credit (HELOC)?
- The HELOC must be from the same lender as the primary mortgage.
- The homeowner must have at least 50% equity in the home.
- The funds must be used to pay for personal expenses like a vacation or car.
- The funds must be used to buy, build, or substantially improve the home securing the loan. (Correct answer)
Correct answer: The funds must be used to buy, build, or substantially improve the home securing the loan.
To deduct the interest on a HELOC, the IRS requires that the loan proceeds be used to "buy, build, or substantially improve" the taxpayer's home that secures the loan. If the funds are used for other personal expenses, such as paying off credit card debt or taking a vacation, the interest is not deductible.
Question 4: A client is purchasing a home and their lender offers them the option to pay 'points' at closing. From a tax perspective, what is the primary benefit of paying these points?
- They reduce the property tax assessment for the first year.
- They are fully deductible in the year paid, reducing taxable income. (Correct answer)
- They increase the cost basis of the home, reducing future capital gains.
- They provide a dollar-for-dollar tax credit against federal income tax.
Correct answer: They are fully deductible in the year paid, reducing taxable income.
Mortgage points, which are a form of prepaid interest, are generally fully deductible in the year they are paid if the loan is for the purchase of a primary residence. This deduction lowers the homeowner's taxable income for that year. Points paid on a refinanced loan, however, must be deducted over the life of the loan.
Question 5: A real estate investor owns a residential rental property. Which of the following expenses related to this property is NOT typically tax-deductible?
- The principal portion of the mortgage payments. (Correct answer)
- The interest portion of the mortgage payments.
- Annual property taxes.
- The cost of repairs and maintenance.
Correct answer: The principal portion of the mortgage payments.
For investment properties, while expenses such as mortgage interest, property taxes, repairs, and maintenance are deductible, the principal portion of the mortgage payment is not. Principal payments are considered a return of capital and increase the owner's equity in the property, rather than being an operating expense.
Question 6: To claim the mortgage interest deduction, a taxpayer must:
- Take the standard deduction.
- Have a mortgage balance of less than $250,000.
- Itemize deductions on their tax return. (Correct answer)
- Be a first-time homebuyer.
Correct answer: Itemize deductions on their tax return.
The mortgage interest deduction is an itemized deduction. This means a taxpayer must choose to itemize their deductions on Schedule A of Form 1040 instead of taking the standard deduction. A taxpayer will generally only itemize if their total itemized deductions (including mortgage interest, state and local taxes, charitable contributions, etc.) exceed their available standard deduction amount.
CMPS - Certified Mortgage Planning Specialist Mortgage and Tax Strategies Questions and Answers
A married couple sells their primary residence for a $600,000 profit.
They have owned and lived in the home for the past 10 years.
How much of the capital gain from the sale can they exclude from their taxable income?