CMPS Mortgage and Tax Strategies 3

Question 1

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?

Accepted Answer

Section 1033

Answer

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.

Question 2

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?

Accepted Answer

20% on Schedule C, 80% on Schedule A

Answer

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.

Question 3

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

Accepted Answer

Home Equity Conversion Mortgage (HECM)

Answer

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.

Question 4

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?

Accepted Answer

$13,600

Answer

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

Question 5

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?

Accepted Answer

Form 1099-C

Answer

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.

(CMPS) Certified Mortgage Planning Specialist Practice Test

(CMPS) Certified Mortgage Planning Specialist Practice Test

CMPS Mortgage and Tax Strategies 3