Mortgage and Tax Strategies Flashcards

A borrower's home was destroyed in a federally declared disaster. They received $40,000 from insurance but had an adjusted basis of $30,000 in the property. Which IRS code section allows deferral of the $10,000 gain?

Answer: Section 1033

Section 1033 allows deferral of gain from involuntary conversions (including casualty losses) if the proceeds are reinvested in similar replacement property within the required period.

A self-employed borrower deducts a home office that equals 20% of their home's square footage. What portion of mortgage interest is deductible as a business expense?

Answer: 20% on Schedule C, 80% on Schedule A

The business-use percentage (20%) of mortgage interest is deductible on Schedule C, while the remaining 80% can still be deducted on Schedule A as home mortgage interest.

Which mortgage structure allows a retiree to receive tax-free loan proceeds while deferring repayment until the home is sold or they move out?

Answer: Home Equity Conversion Mortgage (HECM)

A HECM (reverse mortgage) allows eligible homeowners 62+ to convert home equity into loan proceeds that are not taxable income and require no monthly repayment while they live in the home.

A taxpayer is in the 32% marginal bracket and pays $20,000 in mortgage interest. Assuming full deductibility, what is the after-tax cost of that interest?

Answer: $13,600

The tax savings equal 32% × $20,000 = $6,400, so the after-tax cost is $20,000 − $6,400 = $13,600.

When a lender forgives part of a mortgage balance through a short sale, what IRS form does the lender issue to report the cancelled debt?

Answer: Form 1099-C

Lenders report cancelled or forgiven debt of $600 or more on Form 1099-C (Cancellation of Debt), which the borrower must generally include in taxable income unless an exclusion applies.

The Mortgage Forgiveness Debt Relief Act exclusion for a primary residence requires that the forgiven debt was used to:

Answer: Buy, build, or substantially improve the primary residence

The exclusion applies only to acquisition debt—funds used to buy, build, or substantially improve the taxpayer's primary residence—not to cash-out debt used for other purposes.

A homeowner converts their primary residence to a rental for 3 years and then sells it. They previously lived there for 4 years before converting. Is the Section 121 exclusion available?

Answer: Yes, but prorated for the non-qualified use period after conversion

Post-2009 rules require proration: gain attributable to non-qualified use (rental period after conversion) is excluded from the Section 121 exclusion, but qualified-use gain may still be excluded up to the limit.